{LONGTERMINVESTORS} Fwd: India: December rate cut on the cards

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From: <research@icicibank.com>
Date: Tue, Nov 15, 2016 at 7:34 PM
Subject: India: December rate cut on the cards
To: stockdesai@gmail.com

India: CPI inflation edged lower to 4.20% YoY in October from 4.39% YoY (revised) previously (ICICI Bank expectation: 4.13% YoY). Price pressures in food inflation reduced further, providing comfort to the headline print. Meanwhile, core inflation remained unchanged at 4.9% YoY. We believe at least a 25 bps rate cut in this fiscal is still on the cards. In this regard, low inflation trajectory and impact of demonetization on growth will remain key. CPI continued to edged lower in October Inflation fell to 4.20% YoY in October from 4.39% YoY previously (revised), (ICICI Bank expectation: 4.13% YoY). On a sequential basis, retail inflation edged into positive territory at 0.4% MoM vs. (-)0.2% MoM earlier. Pulses inflation records first single digit print in 21 months Food inflation cooled further, clocking 3.7% YoY versus prior of 4.1% YoY. Barring cereals, meat & fish and prepared meals, reduction in price pressures in this segment remained broad based. Pulses inflation fell to single digit figures for the first time in 21 months at 4% YoY (prior: 14.3% YoY). Government measures to address structural issues in pulses have led to relief in this segment. However, on a month-on-month basis, slight uptick was seen in this category. Vegetables prices continued to remain in deflationary territory for the second consecutive month at (-) 5.7% YoY. The print was in line with trend seen in on-the-ground prices. Price pressures in fruits saw a decline as well. In recent pockets of concern – sugar inflation saw the pace of inflation easing marginally while cereals inflation continued to inch higher. Fuel inflation edged lower to 2.8% YoY from 3.1% YoY in September. Core inflation came in unchanged at 4.9% YoY. Transport and communication rose to 3.4% YoY from 2.7% YoY. This is largely reflective of the recent rise in global crude oil prices. Meanwhile, services ex-transport continued to remain sticky. Clothing inflation came in unchanged at 5.2% YoY while housing inflation recorded a slight downtick. CPI inflation continued to fall in October Source: CEIC, ICICI Bank Research October WPI declined to 3.39% YoY WPI inflation came in lower than expected at 3.39% YoY in October vs. 3.57% YoY previously. The component-wise trend remained similar to that seen in retail inflation. Primary food inflation moderated to 4.3% (prior: 5.8% YoY) with pulses inflation and vegetables seeing some cooling. Meanwhile, fuel WPI inflation edged higher. Core WPI inflation moved up to 1.02% YoY vs. 0.65% YoY previously. Room open for December rate cut With government measures aimed to check supply side pressures (especially in pulses) and favourable monsoon, we expect price pressures to remain in check. On the growth front, we expect to see a sharp slowdown in the near term on the back of Government's demonetization move. If the inflation trajectory pans out along expected lines, there remains room for at least another 25 bps rate cut in this fiscal. Further, our forecasts show inflation picking up marginally (albeit lower than RBI's 5% target) in Q4 FY2017. Consequently, the current lower inflation period is likely to provide the Monetary Policy Committee (MPC) headroom to cut rates to support growth, thereby keeping a December rate cut on the cards. Any room for further easing will be contingent on data and will warrant close monitoring of the inflation dynamics (and developments on 7th Pay Commission awards). Further, risks to other view emanate from any steep rise in crude oil price. Price pressures in food continued to cool Source: CEIC, ICICI Bank Research Regards, ICICI Bank Contact: Niharika Tripathi (+91-22) 2653-1414 (extn: 6943) niharika.tripathi@icicibank.com ​

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CA. Rajesh Desai

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