India rate cuts still likely before 2012 ends

The Reserve Bank of India will wait for the government to curtail fiscal deficit before it unleashes up to 50bps in rate cuts in Q412, says BBVA.

The cautious stance is predicted as India’s June wholesale price inflation dipped in June to 7.35%, below the expected 7.6%, due to lower demand.

Here's more from BBVA:

India’s wholesale price inflation softened in June to 7.25% y/y from 7.55% in May as a let up in fuel and non food articles offset elevated food inflation (see today's India Flash for details). 

The outturn was below expectations (consensus: 7.6% y/y) and, reassuringly, easing demand pressures kept core inflation contained at 4.9% y/y. 

Looking ahead, inflation risks remain as high food prices, upside pressures from a sub-par monsoon, and imminent hikes in regulated fuel prices offset easing demand pressures.

We thus expect the RBI to keep rates unchanged at its meeting on July 31st, all the more so as the monetary authorities await further actions by the government to rein in the fiscal deficit. We continue to expect further rate cuts of 50 bps in 2012, pushed towards 4Q12.