Inflation continues trending down. The sharp deceleration in retail inflation has been a combination of favorable base effect and easing sequential momentum. Meanwhile, weak demand side of the economy, reinforced by sluggish growth indicators, has kept core inflation subdued. Room for any monetary policy easing will likely open up only in early-FY2016 if disinflationary process continues beyond the transient base-effects—the first signs of which will likely emerge in December print. Read Full Report: Kotak Economy
Inflation continues to soften…
The headline CPI inflation decelerated further in October, printing 5.5% after 6.5% in September. This was the lowest since inception of the series. More important, the sequential quarterly momentum has also eased for the fourth successive month and is currently tracking ~4.3% (3M/3M SAAR). Expectedly, the major contribution came from food component, which fell sharply to 5.6%, helped by sequential contraction of 2.6% in vegetable prices from 1.9% correction in September. Most of the other sub-categories in food (protein goods and cereals) saw sequential pick-up. November is likely to see another round of sharp correction on headline inflation (partly helped by favorable base effect), before rebounding to ~7.0% in 4QFY15.
…with steady core inflation
Core CPI (ex food and fuel) inflation was largely unchanged at 5.9% in October. The miscellaneous items inflation (comprising education, medical care and household requisites) printed 4.7%, while housing inflation was a steady 8.0%. However, sequential momentum in core inflation continues to be subdued hinting at (1) muted demand side pressure and thus low pricing power of producers and (2) trickle down of reduction in producers’ input prices owing to falling global commodities. Core inflation is likely to ease further in the coming months helped by favorable base effect of last year. We expect core inflation to average ~6.5% in FY2015 compared to 8.1% in FY2014.
September IIP picks up on pre-festive demand
IIP growth expectedly picked up in September to 2.5% from 0.5% in August owing to pre-festive production boost. The core sector growth and auto sector production data for the month also hinted at some rebound in industrial production. However, this recovery will be transient as in October this trend is likely to revert to trend. Sector-wise, capital goods rebounded sharply to 11.6% from (-)9.8% in September, while consumer durables production contracted 11.3% and non-durables production grew 1.5%.
Scope for policy easing only in FY2016
The better-than-expected CPI inflation print will likely increase the market expectations for rate cuts. We note that retail inflation has indeed eased more than what the base effect would have suggested as the sequential momentum has also abated over the recent months. With the January-March 2015 inflation readings now seen in sub-7% levels (120-130 bps lower than the RBI’s target of 8%), there appears some room for monetary accommodation if the disinflationary process continues. While we rule out any immediate reaction from the RBI, the RBI can have some opportunity in early-FY2016 (after FY2016 Union Budget). However, this scope can be realistically evaluated only after the base effects dissipate after November.
By Kotak Securities