India to snub rate cut on 31 July

This is because the 7.3% dip in June inflation was still above the expected 7%.

In a release by Nomura, India‟s WPI inflation moderated to a lower-than-expected 7.3% y-o-y in June from 7.5% in May. The positive surprise was mainly a result of lower primary non-food articles such as fibres and minerals.

Both food and core inflation remained unchanged at 9.0% y-o-y and 4.9%, respectively, in June. Past upward revisions continued, though at a slower pace, as April was revised up by 27bp to 7.5%.

Here's more from Nomura:

Inflation momentum moderated this month, but it is important to identify whether this moderation is sustainable.

So, can the Reserve Bank of India cut policy rates on 31 July? Based on the RBI‟s own concerns over rising food inflation, elevated retail inflation and a lack of fiscal response from the government, nothing has materially changed to shift the RBI‟s stance.

June WPI inflation was lower than expected, but was still above 7% and one data point does not make a trend. Given the upside risks to inflation from the recent rebound in global commodity prices and a weak monsoon season, we expect all policy rates to remain unchanged on 31 July.

Eventually, rates have to come down. But for this scenario to play out, India‟s inflation has to sustainably decline at or below 6.5%. For now, we expect the RBI to use the Oct-Mar window (of lower headline inflation) to lower the repo rate by 50bp to 7.50%.

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