RBI likely to hold repo rate, focus on falling inflation trajectory over the rate of inflation

India's retail inflation eased in August from a 15-month high hit in the previous month as vegetable prices cooled. 

As per the data released by the Ministry of Statistics and Programme Implementation on September 12, the Consumer Price Index (CPI) inflation for August dropped 61 basis points (bps) to 6.83% from 7.44% in July.

Food inflation, which accounts for nearly half of the overall basket, was up 9.94% in August compared with a rise of 11.51% in July.

Core CPI was below-5% mark for the second consecutive month and stood at 4.86% last month. It was still below the one-year average of 5.62%.

However, the headline retail inflation remained above the upper end of the Reserve Bank of India's (RBI) tolerance limit of 2-6% for a second consecutive month.

Economists expect the inflationary pressures to continue to moderate going ahead and ultimately come under the RBI’s tolerance band in September.

Given the spatial distribution of monsoon and its impact on Kharif sowing and subsequently on cereals inflation, as also steep decline in LPG prices offsetting CPI by 25 bps, economists at State Bank of India (SBI) see good case for retail inflation to slouch towards RBI’s tolerance zone.

With this easing CPI inflation, economists expect the RBI’s MPC to hold repo rates again in its October monetary policy.