India's inflation likely eased below the Reserve Bank of India's medium-term target in August on softer food prices, a Reuters poll showed, raising the probability the central bank will keep interest rates on hold at its next rate review.
The poll of nearly 40 economists conducted from September 4-7 predicted retail inflation eased to 3.86 percent from July's 4.17 percent, below the RBI's 4 percent target for the first time this year.
While nearly three quarters of contributors expected inflation fell below target, two economists expected it to be at 4 percent and the remaining nine said it would be above target. The highest call was 5.4 percent.
Inflation data is due to be published on Sept. 12 at 1200 GMT. Still, core inflation which excludes highly volatile food and fuel components, was expected to remain elevated.
"Headline consumer price inflation is likely to have eased in August due to another fall in food inflation," noted Shilan Shah, a senior Indian economist at Capital Economics.
"But core price pressures are set to remain elevated. The upshot is that the RBI's tightening cycle still has a little bit further to run."
If those forecasts come true, it would give the RBI a breather after it raised rates in its previous two meetings, taking borrowing costs to a four-year high of 6.50 percent to tame speeding inflation.
However, this could be temporary as a weakening rupee and rising crude oil prices would boost consumer prices.
While oil prices have risen nearly 15 percent this year, the rupee touched an all-time low of 72 per dollar on Thursday and was expected to hover near there on a worsening trade balance.
"For the RBI, the policy path is likely to get challenging as inflation is slowing at a time when market volatility is high, and the rupee is at a record low versus the US dollar," wrote Radhika Rao, an economist with DBS Bank.
"If the rupee remains under pressure, the central bank might be forced to hike rates citing risks to inflationary expectations."
India's GDP growth rate reached 8.2 percent last quarter and the diverging paths of growth and inflation could concern RBI policymakers.
The poll forecast industrial output would expand 6.6 percent in July compared with June's 7.0 percent. WPI inflation probably inched down to 4.7 percent in August from 5.1 percent, the poll said.
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