Inflation to cool in June to record-low, could prompt rate cut

India's consumer inflation is expected to have slowed to a record-low in June, pressured by a sharp drop in food and oil prices, a Reuters poll showed, a result that could intensify calls for an interest rate cut.

Consumer price inflation is predicted to cool to 1.70 per cent in June, easing further from May's 2.18 per cent, according to the poll of more than 30 economists taken over the past week.

If realised, it would be the lowest level since the series began in 2012 and below the Reserve Bank of India's (RBI) medium-term target of 4.0 per cent for an eighth successive month. Core inflation, however, has remained stubbornly above 4 per cent since at least 2015.

Forecasts for the headline figure ranged from 1.20 per cent to 2.70 per cent. The data will be released on July 12 at 1200 GMT.

"Inflation is expected to take a downturn on account of deflationary pressures witnessed in vegetables and pulses amid slowdown in fuel prices," said Himanshu Varshney, research analyst at AK Capital.

Food and beverage price index, which accounts for nearly half the consumer price index basket, is forecast to contract 1.05 per cent in May, a significant turn from a peak in July last year when it rose 8.35 per cent.

The India Meteorological Department (IMD) said last week that the nation's cumulative rainfall between June 1 and July 2 was 6 per cent above the long-run average.

Monsoon showers, which deliver about 70 per cent of India's annual rainfall, help drive higher food and grain production, keeping inflation in check.

The RBI kept its benchmark interest rate unchanged in June while softening its hawkish stance following a drop in retail inflation, as predicted in a Reuters poll.

The central bank also lowered its headline inflation forecasts to a range of 2.0-3.5 per cent for the first half of fiscal year 2017/18 and 3.5-4.5 per cent in the second half, down from 4.5 percent and 5.0 per cent, respectively.

"It would be foolhardy to totally rule out a rate cut given that inflation is likely to be close to or below the lower bound of the RBI's target range," said Shilan Shah, economist at Capital Economics.

Looking ahead, the RBI is watching out for the inflationary impact of the goods and services tax (GST), which came into force on July 1, though food products were exempt from taxes under the new system.

Wholesale price inflation is expected to have slowed last month to 1.60 per cent from 2.17 per cent in May, which would be the lowest since May last year.

Separately, industrial output is expected to have risen 1.9 per cent in May after growing 3.1 percent in April due to weaker performances in manufacturing, mining and power generation.

The Nikkei India Manufacturing Purchasing Managers' Index, compiled by IHS Markit eased to a four-month low of 50.9 in June on weak demand.

A poor factory output number on Wednesday could further bolster the case for an RBI rate cut next month to boost Asia's third-largest economy, which grew 6.1 per cent in the January-March quarter, its weakest pace in more than two years.