India Economy - CPI inflation - Moderation of core inflation continues - Anand Rathi

Despite a slight hardening in Feb15 of CPI inflation to 5.4%, vs. 5.2% in Jan15, the overall inflationary outlook is stable. Both food and fuel inflation accelerated while core inflation continued to slide - a trend we expect to continue in Mar15. Barring unforeseen developments, inflation in India is likely to hover around 5%. We expect no rate action before Aug15.

Performance. CPI inflation for Feb15 rose to 5.4% vs. 5.2% the prior month. The jump was on account of the rise in food and fuel inflation in Feb15 to 6.7% and 4.7%, respectively, vs. 6.2% and 3.8% in Jan15. This led to the rise in non-core (food and fuel) inflation to 6.4% in Feb15 vs. 5.9% in Jan15. Core (non-food, non-fuel) inflation, however, slipped marginally to 4.5% in Feb15 vs. 4.6% the previous month. Services inflation in Feb15 dipped 26bps from Jan15 while manufactured product inflation was largely unchanged during these two months.

Assessment. While the Feb15 CPI inflation came higher than the consensus expectation, it was slightly below our expectations. The unfavourable base and rise in food prices, inter alia, due to unseasonal winter rains contributed to the acceleration in inflation during the month over the month prior. Interestingly, while deflation in retail prices for diesel and petrol deepened in Feb15 vs. Jan15, fuel inflation accelerated. In Feb15 the increase in inflation over the previous month arose because of the rise in rural inflation while urban inflation held unchanged.

Outlook. Untimely rains in many parts of the country have damaged crops and resulted in higher food prices. Moreover, the upward revision in retail diesel and petrol prices in Mar15 vs. Feb15 would put upward pressure on fuel inflation. Consequently, a rise in non-core inflation next month is likely. Core inflation, on the hand, is likely to be subdued. Barring a sharp spike in food prices, inflation in Mar15 is likely to be largely flat, at the Feb15 level.

Recommendations. During 2002-07, CPI inflation in India had averaged 4.8%, accelerating sharply to 9.5% during 2008-14, primarily because of the steep rise in food and fuel inflation. Yet, during Sep14-Feb15, inflation averaged 4.7%. With a modest increase in the minimum support prices for agricultural products, no major spike in international crude oil prices and generally supportive supply-side factors, inflation in India is likely to be about 5% in the next 12-18 months. This would broadly lie within the comfort zone of the inflation-targeting RBI. With the 50-bp policy rate-cut in the last two months, we expect that another cut by the RBI would be highly data dependent. We expect no further rate cut until Aug15.

Source : Equity Bulls

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