After hitting a low of 2.99 percent for April, retail inflation is likely to fall further for May, while factory output for April is expected to have slowed down.
"May 2017 Consumer Price Index or CPI inflation is likely to come in at 2.3 percent, lower than the 3 percent reading for the previous month," Teresa John, economist at brokerage Nirmal Bang Institutional Equities said in a note on Friday.
"The decline in CPI inflation can be attributed to the fall in food inflation, particularly continuous disinflation in pulses, and soft vegetable prices combined with the base effect," she added.
The Reserve Bank of India (RBI) had forecast inflation to fall in the range of 2.0-3.5 per cent in the first half of the financial year and 3.5-4.5 per cent in the second half.
The expected fall in inflation is seen as raising the possibility of a rate cut by the RBI when the Monetary Policy Committee (MPC) holds its third review meeting. "Given the fact that inflation will be soft for the next two months, and the dovish stance of the Reserve Bank of India or RBI, we believe there is high likelihood of a rate cut by the central bank at its August 2017 meeting," she wrote.
However, the good news is likely to be dampened by a slowdown in factory output, or index of industrial production (IIP).
"The IIP is likely to come in at 1.2 percent YoY for April 2017, down from 2.8 percent YoY in the previous month," John wrote in her note.
The estimate is in contrast to India's manufacturing activity that rose to 52.5 in April, same as in March and a tad higher from 50.7 in February.
Risks to inflation
The RBI's MPC had cited global uncertainties and hike in allowances for Central government employees as risks to inflation going up. "At the current juncture, global political and financial risks materialising into imported inflation and the disbursement of allowances under the 7th central pay commission's award are upside risks," the MPC said on Wednesday after the conclusion of the two-day meeting in Mumbai.
