Inflation continues to inch up.
CPI inflation continued to move up and looks set to touch the 4% mark in November. Vegetable prices continued increasing sequentially on the back of unseasonal rains even as core inflation remained flat. We maintain our call that the RBI would pause for the rest of FY2018. With RBI fixed on the 4% target on a durable basis, and with a plausible case of fiscal slippage and worsening global commodity price cycle, room for further policy easing looks to have diminished significantly—unless economic data surprises on the downside meaningfully.
October CPI inflation picks up as supply disruption weighs on food prices
CPI inflation accelerated further to 3.58% in October from 3.28% in September (Exhibit 1), led largely by surge in food inflation. Food inflation was at 1.9% compared to 1.2% in September. On a sequential basis, the food index moved up 0.9% mom compared to (-)1.4% in September led by unseasonal rains and the consequent disruption in supply. Vegetables prices increased 3.8% mom while prices of eggs and milk increased by 0.7% each. Spices and prepared meals increased 0.5% each while cereal prices increased 0.4%. On the other hand, prices of fruits and pulses continued to contract sequentially. The high frequency data from mandis indicate some moderation in price increases of vegetables and cereals in November. However, adverse base effect is expected to sharply push up food inflation in the subsequent readings. Fuel and light inflation moved up to 6.4% (5.6% in September).
Core CPI inflation remains flat
Core inflation (CPI excluding food, fuel, pan and tobacco) came in flat at 4.4% in October. On a sequential basis, though, core inflation moderated at 0.5% increase, compared to 0.73% in September. The sequential uptick in housing segment (1.2% mom), clothing and footwear (0.6% mom), health (0.5%) and education (0.4%) was offset by the expected fall in prices of ‘transport and communication’ ((-)0.4% mom) led by the excise duty reduction on petrol and diesel by the center and VAT rates by a few states in October. We expect core inflation in a range of 4.3-4.7% for the rest of FY2018 led by (1) continuing pass-through of the center’s HRA impact, (2) higher crude oil prices and (3) adverse base effect. However, reduction in GST rates for multiple categories along with muted demand-side pressures should keep sharp upticks capped.
Inflation trend supports RBI staying put for rest of FY2018
We expect headline CPI inflation to be around 4% in November and continue to inch above RBI’s mid-point target of 4% thereon as (1) adverse base effect, (2) mean reversion of food prices, (3) higher global commodity prices and (4) 7CPC HRA impact continue to weigh on the inflation trajectory. We expect headline inflation to move towards 4.5% by March 2018 and around 4.9% by March 2019 (excluding states’ 7CPC HRA implementation, which when implemented will push up headline inflation by around 85 bps on an average). We maintain our call for a pause by RBI in the foreseeable future given the uptrend in inflation trajectory.
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