Tumbling prices in India boost expectations for more rate cuts

India's wholesale prices tumbled for a tenth straight month in August, pressured by falling fuel costs, bolstering prospects of an interest rate cut by the Reserve Bank later this month.

The wholesale price index (WPI) fell an annual 4.95 per cent last month compared with a 4.40 per cent year-on-year decline forecast by economists in a Reuters poll and a provisional 4.05 per cent slide in July.

With price pressures at record lows, expectations are building that the Reserve Bank of India (RBI) will lower borrowing costs by at least 25 basis points (bps) at its next policy review on Sept. 29, after three cuts earlier this year, to spur economic growth.

"This strengthens our view that interest rates will be cut at the RBI's policy meeting later this month," wrote Shilan Shah, an analyst with Capital Economics in Singapore. 

Retail inflation is forecast to have eased to 3.6 per cent in August from a record low of 3.78 per cent in July, according to analysts polled by Reuters.

Calls for a rate cut have grown louder after annual economic growth slowed to 7 per cent in the April-June quarter from 7.5 per cent in the previous quarter.

And some economists fear real growth is more sluggish than official figures suggest. Arvind Panagariya, a top policy adviser to the government, last week said the economy needed 50-100 bps of rate cuts.

The wholesale fuel prices tumbled 16.50 per cent in August from a year ago, while food prices dropped 1.13 per cent year-on-year.

Deflationary pressures?

The rapid deceleration in prices has ignited a debate in New Delhi whether Asia's third-largest economy is heading towards deflation.

Arvind Subramanian, Modi's chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.

While food inflation has broadly remained in check despite below average summer monsoon rains, prices of some staples such as onions are racing up. Wholesale vegetable prices, for instance, gained nearly 17 per cent from July.

Entrenched expectations of high inflation also are feeding into higher wages. "Yes, there has been moderation in some prices, but that's not signalling deflation," said N Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. "In fact, we are not anywhere near that."