Retail inflation drops to 13-month low of 4.31%

India's retail inflation cooled to a 13-month low in September, helped by moderating food prices, giving room for the central bank to cut interest rates again if needed.

The consumer price index (CPI) rose 4.31 per cent last month from a year earlier, its slowest pace since August 2015, government data showed on Thursday.

Analysts polled by Reuters had expected the CPI to rise 4.80 per cent, after a 5.05 per cent gain in August.

In a surprise move earlier this month, the Reserve Bank of India (RBI), under new Governor Urjit Patel, cut interest rates by 25 basis points to 6.25 per cent on expectations that food inflation would ease in the months ahead.

The latest prices data backed that assessment as annual food inflation sharply slowed to 3.88 per cent in September from 5.91 per cent a month ago.

With strong crop sowing on the back of good summer rains widely expected to keep a lid on food prices, and a benign outlook for global commodity prices, inflation is expected to remain in check.

"Until February we are going to see benign prints in CPI, which will open up space for at least one more rate cut in fiscal year 2016-17 under the present regime," said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

After this month's surprise rate cut, many economists revised their interest rate outlook and are now expecting the central bank to cut its key repo rate further by as much as 50 bps.

Bolstering the rate cut hopes is the decision of the RBI's recently formed monetary policy committee to relax the timeline for meeting its inflation target.

The central bank now expects to hit its four per cent inflation target by 2021 instead of 2018 as proposed earlier.

It also slashed the real interest rate target to 1.25 per cent, from the 1.5-2 per cent band set by Patel's predecessor Raghuram Rajan, giving itself more room to cut rates further.

However, a pending increase in house rent allowance for millions of government employees and pensioners as well as a nationwide rollout of a new sales tax next year are expected to increase prices.

Analysts at Nomura expect the rise in house rent allowance to add 100-150 bps to the headline inflation. Similarly, the implementation of a general sales tax from next April is likely to increase inflation by as much as 70 bps, they say.