India’s inflation eased below the central bank’s target for the first time in nearly five years, though it is unlikely to spur interest rate cuts just yet as policymakers want to see a sustained decline in prices.

The consumer price index (CPI) rose 3.54% in July from a year earlier, data from Statistics Ministry showed on Monday. That’s the slowest pace since August 2019 and compares with a median forecast of a 3.60% increase predicted by economists in a Bloomberg survey. Inflation climbed 5.08% in June.

The reading is in line with the central bank’s estimate that had flagged last week that headline inflation will decline in July due to statistical reasons. Inflation is expected to edge up in the September-December period as favourable base effects taper off, the central bank had said. 

Food prices, which make up about half of the consumer price basket, climbed 5.42% from a year ago, compared with 9.36% in June. Core inflation, which excludes volatile food and energy costs, jumped to 3.37% in July from a year earlier, compared with 3.15% in June, according to calculations from Bloomberg Economics.

Surplus monsoon rains, which irrigate half of the nation’s farmland, are expected to ease food costs further in the coming months. The Reserve Bank of India expects average inflation of 4.5% in the fiscal year through March.

“The slump in India’s inflation to a five-year low in July provides room for the central bank to pivot to rate cuts in October. The much-larger surge in vegetable prices a year ago supported the decline. That, coupled with a drop in food prices so far in August, suggests that inflation is likely to undershoot the Reserve Bank of India’s (RBI) projection for the current quarter,” said Abhishek Gupta, India economist at Bloomberg Economics.

The central bank left its benchmark interest rate unchanged for the ninth straight meeting and struck a cautious tone as high food prices keep inflation above its central bank’s target aim. Das has said in the past the central bank wouldn’t consider easing unless inflation settles durably around its goal. 

Most economists don’t expect the RBI to ease borrowing costs until the final quarter of this year, predicting it will likely move only after the US Federal Reserve pivots.

“We continue to maintain that the central bank will be on a status quo mode on rates for the October policy, with likely shift in stance,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, by message. The scope for a shallow rate easing cycle could open from December but much will be data dependent both in Indian and the US, she said. 

Other highlights from the CPI data:

  - Bloomberg