India August inflation spike to limit policy rate cut

But a 25bp slash in cash reserve ratio still looms.

According to BBVA, India’s wholesale price inflation jumped in August to 7.6% y/y (consensus: 7.1%) from 6.9% in July, driven by a broad based pick up in prices. Core inflation rose for a fifth straight month (5.7% y/y vs 5.4% previously) as a rise in global commodity prices fueled input cost pressures.

Here's more from BBVA:

Looking ahead, upside risks to our 7.3% inflation projection for 2012 have increased, particularly in light of yesterday’s decision by the government to hike diesel prices, and a probable extension of the liquidity-led rally in global commodities following QE3.

We expect the RBI to keep rates steady at its next policy meeting on September 17th given India’s still-high inflation rate, but a 25bp cut in the cash reserve ratio to 4.5% is possible in order to help reduce funding costs for banks. We continue to expect 50bps in rate cuts in the last quarter of 2012 to address growth concerns.

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