India's retail inflation is expected to have dropped to a four-month low in March on softer food and fuel prices and as already slowing demand likely plummeted due to a nationwide lockdown towards the end of the month, a Reuters poll found.

Share Market Live

NSE

Price pressures will probably ease further this month as economic activity ground to a halt after Prime Minister Narendra Modi imposed a 21-day lockdown from March 25 in an attempt to curb the spread of the retail inflation.

"Inflation will continue to edge lower. Perhaps, at a faster rate than we had earlier expected on account of a slowdown in activity and decline in food inflation spikes," said Sakshi Gupta, senior India economist at HDFC Bank.

Inflation is likely to have eased to 5.93% last month from 6.58% in February, the April 7-8 poll of over 40 economists showed.

If realized, it would be the lowest since November but still closer to the higher end of the Reserve Bank of India's target band of 2-6%. Forecasts in the poll ranged between 3.90% and 7.00%.

"We expect a continued and sizeable drop in food prices. In addition, core inflation also fell with social distancing impacting the transport, communication and recreational component of the service sector," said Kunal Kundu, India economist at Societe Generale.

"Falling crude prices and the pass-through - though offset by the government using the opportunity to raise taxes on petrol and diesel - should also help keep headline inflation in check."

A separate Reuters poll of economists showed Asia's third-largest economy likely expanded at its slowest pace in eight years in the quarter ending March and would slow further this quarter.

To combat the slowdown, the government announced a 1.7 trillion rupees ($22.6 billion) stimulus plan, making direct cash transfers and implementing food security measures to give relief to millions of poor hit by the lockdown.

The central bank, for its part, cut interest rates by 75 basis points in an emergency meeting on March 27 and has taken steps to shore up liquidity, in line with most major central banks around the world.

Softer inflation would give the RBI reason to cut borrowing costs further but some economists do not expect that to be the driver of policy for now.

"We believe inflation is neither a concern nor the focus for the RBI currently. It will continue to look past inflation for the time being and use policy tools, conventional as well as unconventional, in its response to the current crisis," said Rini Sen, India economist at ANZ.