New Delhi, September 14

India’s inflation dived to a new low in August, helped by falling global commodity prices, bolstering prospects of an interest rate cut by the Reserve Bank of India (RBI) later this month.

Retail inflation, which the central bank tracks to set rates, eased to 3.66 per cent in August from a revised 3.69 per cent a month ago. The reading was almost in line with 3.6 per cent forecast by analysts in a Reuters poll and way below the RBI’s six per cent target for January 2016.

It came hours after other government data today showed wholesale prices tumbled for a 10th straight month last month, falling an annual 4.95 per cent compared with a provisional 4.05 per cent slide in July.

With price pressures at record lows, expectations are building that the RBI will lower borrowing costs by at least 25 basis points (bps) at its next policy review on September 29, after three cuts earlier this year, to spur economic growth.

“The inflation trajectory will be lower than RBI’s estimate,” said A Prasanna, an economist with ICICI Securities Primary Dealership Ltd, who expects the central bank to deliver a 25 basis points of rate cut a fourth time this year.

Calls for a rate cut have grown louder after annual economic growth slowed to seven per cent in the April to June quarter from 7.5 per cent in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest.

Arvind Panagariya, a top policy adviser to the government, last week said the economy needed 50 to 100 bps of rate cuts.

Being a net importer and consumer of commodities, India is reaping the dividends of a slump in global prices of coal, oil, iron ore and other basic materials.

The rapid deceleration in prices has ignited a debate in New Delhi whether Asia’s third-largest economy is heading towards deflation.

Arvind Subramanian, Modi’s chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.

RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.

For the RBI’s action, as for many other central banks’ around the world facing sluggish growth, much will depend on whether the US Federal Reserve raises interest rates this week for the first time since 2006.