Inflation peaking off; August CPI likely at 3.8%: Report

New Delhi: Retail inflation in India is peaking off and could decline below the 4 percent level in August, following which the Reserve Bank is expected to hold rates in its policy review meet in October, says a report.

According to a Bank of America Merrill Lynch (BofAML) report, inflation risks are overdone and the fundamentals of the economy do not support higher inflation.

Retail inflation fell to 9-month low of 4.17 percent in July on declining vegetable prices.

Reacting to the inflation numbers, the report said inflation is expectedly peaking off as base effects reverse. "We track August inflation at 3.8 percent with daily data showing that food price inflation is coming off further," BofAML said.

The report further noted that "with base effects reversing, core inflation has also eased to 5.08 percent from June's 5.14 percent".

It noted that the fundamentals of the country do not support higher inflation as growth remains weak with capacity utilisation running at sub-75 percent and though the July industrial growth jumped to 7 percent on a year-on-year basis, sequentially it contracted by 1.5 percent. Moreover, liquidity conditions are also tight.

Regarding monetary policy stance, the BofAML expects "the RBI Monetary Policy Committee (MPC) to be on long hold, if rains normalise".

In the August policy review meet, the six-member MPC headed by RBI Governor Urjit Patel for the second time in two-month raised interest rate by 0.25 percent on inflationary concerns.

The next meeting of the MPC is scheduled on October 3-5, 2018.