July CPI inflation eases, production up: DBS Group Research

Jul CPI inflation eased to 3.8% YoY below consensus and our estimate of 4.4% vs Jun's 5.4%. Although base effects were expected to temper Jul's print, there was also a significant pullback in the sequential pace. Inflation rose 0.6% MoM, half the pace of the month before. Food inflation slowed to 2.9% from Jun's 5.7% on broad easing across the subcategories.

Vegetable prices declined ~8% YoY and accounted for much of the downside surprise in yesterday's reading. Pulses inched up a touch on year terms, but nearly flat on sequential basis, while proteins (eggs, meat/fish) eased. The earlier dire monsoon prediction had selectively lifted price pressures in these components in Jun, but has eased off into Jul. Jun to early-Aug rainfall is now 6% below the long-term average.

Non-food components (see chart, top next page) were benign, barring the housing index which rose 0.8% MoM (vs -0.5% in Jun) which was a payback for last month's bi-annual adjustment. Under the miscellaneous category, the transportation segment slipped as domestic fuel prices were adjusted down to reflect fall in global crude prices. Price pressures in the overall miscellaneous component eased to 3.4% YoY in Jul (vs Jun's 4.2%). Core inflation (ex food and fuel) also accordingly slowed to 4.3% from Apr-Jun's 4.6%, pointing to tepid second-round impact from the increase in service tax and soft demand conditions.

Odds of another rate cut before end-year have risen after yesterday's CPI numbers. The RBI had highlighted in this month's policy review that Jul-Aug inflation will be distorted by base effects. However if Aug's inflation (due mid-Sep) also undershoots the RBI's CPI fan chart significantly, probability of a cut in September will rise.

Overall, while the bout of weakness in capital goods is of concern, this component is routinely lumpy and subject to notable swings. Besides the early turn-up in durables demand is a positive amid real incomes amid low inflation, even as rural wages stagnate. It needs to be seen if this strong run continues when base effects fade. Exports meanwhile remain a drag, with receipts declining 16% between Jan-Jun15. Overall, the underlying production trends suggest that upcycle is underway led by aggregate demand but the pace will be gradual. After rising 2.8% in FY14/15, we expect industrial production to rise to 4-5% this year (Apr-Jun15 stands at 3.2%).

Key Asia Highlights from the report:

Currencies: We have downgraded our Asian currency forecasts in response to China's devaluation
MY: GDP growth for 2Q15 will likely moderate
IN: Jul CPI inflation eases, production up
US: Forget about China exporting deflation to the US. It's already there in 17% of the economy
JP: Brace for weak GDP data
Fixed Income: Negative sentiment on CNY fixing devaluation dissipated in US trading hours

Source : Equity Bulls

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