India: July inflation reprieve to boost likelihood of status quo – Nomura

Analysts at Nomura note that India’s CPI inflation was lower than expected in July, falling to 4.2% y-o-y from a downwardly revised 4.9% in June, led by food price (1.4% from 2.9%) and core (CPI ex-food and beverages, fuel) inflation (6.1% from 6.4%).

Key Quotes

“Base effects contributed to the drop, but sequential core momentum also moderated – we estimate that “super core” inflation rose 0.17% m-o-m, sa, in July versus a downwardly revised 0.21% in June (initial: 0.46%) and an average of 0.63% during Mar-May.”

“The downward revision of the previous month’s data, combined with weaker core inflation trends suggests that May-June inflation marked the peak.”

“We expect headline inflation to fall to ~4.4% y-o-y in Q3, from 4.8% in Q2, and an average of ~4.2% during Oct-Mar, both below the RBI’s projections. Because of our expectation of moderating growth in H2 and softer core pressures, we expect rates to be on hold through March 2019.”

“Soft core reading should boost the likelihood of a status quo for policy rates at the RBI’s policy meeting in October, and beyond. Persistent currency pressures are the main risk to this view.”