13/05/2015 9:51 AM IST | Updated 15/07/2016 8:25 AM IST

Inflation Cools, Manufacturing Slows: Higher Odds Of RBI Rate Cut Next Month

Indians buy vegetables at a market in Ahmadabad, India, Tuesday, Oct. 14, 2014. India's benchmark inflation rate fell to a five year low of 2.4 percent in September as food and vegetable prices dropped, the Commerce Ministry said Tuesday. (AP Photo/Ajit Solanki)

India's retail inflation cooled to a four-month low in April on slower annual increases in food costs and industrial output growth slipped to a five-month low in March, boosting odds for an interest rate cut by the central bank next month.

Retail prices rose 4.87 percent year-on-year last month, their slowest pace since December, close to a 4.90 percent annual rise predicted by analysts in a Reuters poll. In March inflation was 5.25 percent, revised figures showed.

Annual growth in production at factories, mines and utilities slowed to 2.1 percent in March, the slowest pace since last October and sharply below revised growth of 4.9 percent growth a month ago.

With inflation staying well below the 6 percent upper end of the Reserve Bank of India's (RBI) target range and growth momentum weakening, analysts are expecting the central bank to lower lending rates for a third time this year.

"With inflation coming lower and IIP (industrial output) also a little low, chances of a rate cut in June have increased," said Ashish Vaidya, head of trading at DBS in Mumbai.

The RBI has cut rates by a 50 basis points since January and is due to review them next month. It left rates unchanged in April, saying it would watch for transmission of previous rate cuts and price rises.

Tuesday's mixed economic data, however, highlights the need for Prime Minister Narendra Modi to revive corporate spending and encourage consumers to loosen their purse strings as he prepares to start his second year in office.

The nationalist leader came to power in May last year, winning the first outright parliamentary majority in 30 years with a promise to reboot economic growth and tamp down inflation.

Over the past year, Modi has taken a slew of measures to stabilize the economy and attract investment. But while inflation has cooled, in large measure due to the dramatic fall in global oil prices, recovery in India's domestic demand-driven economy remains sluggish.

Consumer goods output, a proxy for consumer demand, has fallen in nine out of past 12 months. It shrank an annual 0.7 percent in March.

"One thing is for sure: growth has weakened considerably and the government somehow has to find out radical measures to move investment sentiment," said Rupa Rege Nitsure, chief economist at L&T Financial Services.

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