<div>India's inflation probably cooled further in August, data on Monday is expected to show, adding pressure on the cautious Reserve Bank of India (RBI) to cut interest rates again as soon as this month to spur economic growth.</div><div> </div><div>With price pressures at record lows, expectations are building that the RBI will lower borrowing costs by at least 25 basis points (bps) at its next policy review on Sept. 29, after three cuts earlier this year.</div><div> </div><div>Calls for a rate cut have grown louder after annual economic growth slowed to 7 percent in the April-June quarter from 7.5 percent in the previous quarter. And some economists fear real growth is more sluggish than official figures suggest.</div><div> </div><div>Arvind Panagariya, a top policy adviser to the government, said last week said the economy needed 50-100 bps of rate cuts. Similar calls were made by Indian business leaders at a meeting with Prime Minister Narendra Modi last Tuesday.</div><div> </div><div>Annual consumer price inflation, which the central bank tracks to set rates, likely eased to 3.6 percent in August due to lower fuel prices, from a record low of 3.78 percent in July, according to analysts polled by Reuters.</div><div> </div><div>Wholesale prices, another inflation gauge, are expected to have fallen for a 10th straight month, tumbling 4.40 percent on-year compared with a 4.05 percent fall in July.</div><div> </div><div>Indeed, the rapid deceleration in prices has ignited a debate in New Delhi whether Asia's third-largest economy is heading towards deflation.</div><div> </div><div>Arvind Subramanian, Modi's chief economic adviser, early this month warned of looming deflation and called for measures to boost consumer demand and step up investment.</div><div> </div><div>RBI Governor Raghuram Rajan, however, is worried about a resurgence in price pressures in a country where inflation has been notoriously volatile.</div><div> </div><div>While food inflation has remained in check despite below average summer monsoon rains, prices of some staples such as onions and lentils are racing up. Entrenched expectations of high inflation also are feeding into higher wages.</div><div> </div><div>"Yes, there has been moderation in some prices, but that's not signalling deflation," said N. Bhanumurthy, senior economist at the NIPFP policy think-tank in New Delhi. "In fact, we are not anywhere near that."</div><div> </div><div>But for the RBI, as for many other central banks around the world facing sluggish growth, much will depend on whether the US Federal Reserve raises interest rates this week for the first time since 2006.</div><div> </div><div>Easing policy at the same time as the Fed is tightening, however modestly, could spur further capital outflows from emerging markets.</div><div> </div><div>While some analysts believe the chances of a September hike have eased amid fears of a China-led global slowdown, any fresh burst of financial market volatility following the Fed's decision on Sept. 17 could force the RBI to stand pat.</div><div> </div><div>"If there is a (US) hike, then market reaction will need to be monitored," said A. Prasanna, an economist with ICICI Securities Primary Dealership Ltd. "I still expect markets to calm down by the time of RBI policy date."</div><div> </div><div>"Indian industry continues to be under the grip of deflation. With the WPI falling by 4.9 per cent compared to its level a year ago, price pressures are at a record low. The index has declined for the tenth consecutive month indicating slackness in economic activity across sectors. Given that CPI inflation has also been declining, the RBI needs to reduce interest rates sharply to drive a recovery in demand," said Chandrajit Banerjee, director general, CII.<br><br>The RBI has lowered rates by a total of 75 bps since January. However, it left the policy repo rate on hold at 7.25 per cent at its last meeting, tying future cuts to the inflation outlook.</div><div> </div><div>Rajan has criticised banks for not passing on the entire benefit of its 75 basis points. The lenders have reduced their base rates only by about 30 basis points in two to three installments, citing higher cost of funds for them.</div><div> </div><div>At the last policy announcement on August 4, Rajan had even linked next easing to banks cutting their rates more aggressively.</div><div> </div><div>(Agencies)</div>