Still some room for a rate cut given downside risks to RBI’s growth projections
* CPI inflation remained unchanged MoM at 3.3% in September 2017. This was marginally higher than our expectation of 3.2%, but lower than market consensus of 3.6%.
* Food inflation eased slightly to 1.3% in September 2017, while core inflation touched a six-month high of 4.6%. The uptick in core inflation was largely on account of a surge in housing inflation.
* Furthermore, the index of industrial production (IIP) grew 4.3% YoY in August, exceeding our/consensus estimate of 2.4%/2.6%. A recovery was observed in manufacturing, along with a surge in mining activity and electricity generation.
* We expect headline inflation for 2HFY18 to remain in line with the RBI’s projections, but also see some downside risks. Hence, we believe that there is still some room to cut interest rates.
I. Retail inflation unchanged at 3.3% in September
* CPI inflation unchanged at 3.3%: CPI-based inflation remained unchanged MoM at 3.3% YoY in September 2017 (Exhibit 1). Although the number was marginally higher than our expectation of 3.2%, it was below market consensus of 3.6%. CPI inflation has come in lower than consensus estimates in five of the last six months (it was higher than expected in August 2017).
* Food inflation eases slightly…: Food inflation eased to 1.3% in September from 1.5% in the preceding month. This was largely driven by a fall in vegetables inflation to 3.9% from 6% in August 2017. On an MoM basis, vegetables prices declined 7.1%, after rising by 34.2% over the last four months. Inflation in other food items remained largely unchanged MoM in September.
*…while core inflation touches six-month high…: Core inflation (all items excluding ‘food & beverages’ and ‘fuel & light’) rose to a six-month high of 4.6% in September from 4.4% in the preceding month (Exhibit 3). This was the third straight month of rise in core inflation. Core-core inflation (excluding petrol/diesel from core inflation) too edged up to 4.4% from 4.2% in August.
* …led by rise in housing inflation: Uptick in both core and core-core inflation in September can largely be ascribed to a rise in housing inflation, which touched a three-year high of 6.1% (Aug’17: 5.6%) on account of implementation of 7th CPC House Rent Allowance (HRA) hikes from August. Inflation in core services eased, while that in goods remained unchanged in September (Exhibit 4).
* Although headline inflation is expected to rise gradually in 2HFY18 on account of an adverse base effect, it should remain in line with the RBI’s projections. However, we believe that there are downside risks to the RBI’s growth projections, leaving room for interest rate cuts.
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