Weak inflation figures to give RBI the elbow room to lower rates by 25bps this month : DBS Group Research

Cementing rate cut expectations, Aug CPI inflation stayed weak at 3.7% YoY steady from (revised) Jul's pace and way lower than Jan16 RBI's target of 6%. Base effects were expected to weigh on headline CPI, with broader disinflation­ary pressures also playing a part in keeping inflation near eight-month lows. Food inflation stabilized at weak levels up 2.9% YoY, up a notch from 2.8% the month before. Retail data had seen prices of staples/ cereals ease but offset by rise in few commonly used vegetables (particularly onion). This reflected in a smaller fall in the vegetable inflation to -6.4% YoY from -8% month before (base effects kept the headline in red). Pulses inched up a touch on year terms, while proteins (eggs, meat/fish) eased. The below-average monsoon has selec­tively lifted price pressures in these components in Aug. At last count, the south­west monsoon is 15% below the long-term average.

Amongst non-food components, inflation was broadly steady. Global crude pric­es plunged anew last month to fresh lows for the year, which weighed on the related sub-components, especially transport and communication (see chart on left). The latter declined -1% YoY down from average 0.1% in Apr-Jul15. Contri­bution by other service sector segments have flatlined in recent months, while core CPI stays subdued below 5% in Aug, for the ninth consecutive month.

WPI deflation meanwhile deepened to -4.95% YoY, a record low for the series and down from Jul's -4.1%. Deflationary forces were evident across the board, but starkest in the fuel/light and minerals category. Fuel (& light) prices fell 16.5% YoY while minerals contracted 28.3%, both in red for the last ten months. Food price inflation fell -1.1%, dragged by easing protein prices, while vegeta­bles and pulses stayed firm.

Deflation in the manufacturing products intensified to -1.9% from -0.6% in the Jun quarter. Core WPI measure held in small red. Bulk of the weakness in the WPI inflation has been on account of higher weightage of tradables in its basket and sharp fall in commodity prices. Lower WPI inflation suggests pipeline pres­sure continue to wane, validating broader expectations that the retail inflation measure will also remain in control in the coming months.

Looking ahead, fading base effects will lift Sep CPI inflation towards mid-4% and drift higher to stabilise 5-5.5% in the December quarter. Headline WPI will also return to black Oct-Nov onwards but still-average a tepid 0.2% for the year. These weak inflation number give RBI the elbow room to lower rates by 25bps this month. Of immediate concern is the US Fed meeting this week. A dovish/ cautious US Fed will pave the way for the RBI to lower the Repo rate to 7% on 29 Sep and possibly follow-up with another rate cut at the December meeting. In the remote chance that the US raises rates this week, the RBI might prefer to extend the wait-and-watch stance to allow markets to stabilise and price in further US rate increases, before lowering Indian rates further.

Source : Equity Bulls

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