August CPI inflation eases to 3.69 percent: Experts believe RBI will hike rates in October to support falling rupee

Mumbai/Bengaluru: India’s annual retail inflation eased to 3.69 percent in August from 4.17 percent in July, the statistics ministry said on Wednesday, helped by a smaller rise in food prices.

Analysts polled by Reuters had forecast August annual increase in the consumer price index at 3.86 percent.

Experts weigh in:

Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI

CPI inflation at 3.69 percent was in line with market expectations. Even though CPI inflation has cooled off, we believe October rate hike of 25 bps is imminent, but the question is whether the magnitude of rate hike could be even higher by 25 bps (say 50 bps). A currency crisis by logic calls for a bigger rate intervention, but given that RBI is now an inflation targeting central bank it will be really difficult to justify such action with inflation numbers continuing to be in 4-4.7 percent range through current fiscal, with the downside at sub 3.5 percent in November’18.

Anagha Deodhar, Economist, ICICI Securities, Mumbai

“The August inflation number is in line with our expectation. Falling domestic currency could accentuate the impact of rising oil prices on inflation. We expect this double-whammy of weakening rupee and rising oil prices to exert upward pressure on inflation in the coming months.

The recent surge in core inflation is primarily driven by rising costs of housing and transportation. We expect core inflation to remain sticky in the coming months due to rising transportation costs.

In Q2, we again expect inflation to undershoot MPC’s forecast of 4.6 percent by 50-60 bps. Hence, we expect central bank to hold rates in October. We do not subscribe to the view that policy rates should be hiked to support falling rupee.”

Gaurav Dua, Research Head, Sharekhan, Mumbai

“Soft food and vegetable prices due to good agri produce has led to lower-than-expected inflation. I think RBI will take up a wait-and-watch policy when it comes to a rate hike.

The key risks to inflation would be the rise in energy prices globally and the rupee depreciation.

The factor RBI will be looking out for is inflation during the festive season. So maybe, we’ll see another set of IIP and CPI numbers before RBI makes a rate hike call by around 25bps. We expect it by the end of this year or early next year.”

Radhika Rao, Economist, DBS Bank, Singapore

“Inflation came in line with our expectations. A seasonally weak period for food inflation helped to offset the impact of rising fuel/transport costs. High global oil prices coupled with a weak rupee have sent domestic fuel prices to record highs.

As the early-October RBI review nears, expectations are building for a hike. Despite inflation slipping below the medium-term target of 4 percent, if the rupee remains under pressure, the RBI might be forced to hike rates citing risks to inflationary expectations, given its price stability mandate and second order impact of a weak currency. We have built in a likelihood of a 50bp hike in rest of FY19.”

IIP

Jul’18 IIP momentum remained strong at 6.6% yoy, following the cue from last month’s reading of 6.9%. Both these numbers are on lower base of last year, which has been broadly on expected lines. Consumer durables sector which had declined since demonetization till Oct’17, is likely to continue to depict a much stronger number. This coupled with government reflationary to improve rural economy is likely to further boost the sectors performance. We attribute the cyclical uptick in IIP to higher government revenue spending, depreciation in INR/USD, rising household leverage and improving income levels. IIP growth in FY19 is likely to accelerate to an average of 6-6.5% v/s 4.4% in FY18; up till now the average for Apr-Jul’18 is at 5.5%.

Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services

Retail inflation continued to ease, as it dropped to 3.7 percent y-o-y in August against our expectation of 3.4 percent. Persistent volatility in food inflation eased the overall CPI reading, as excluding vegetables the CPI remained elevated at 4.8 percent y-o-y, tad lower than July reading. Core inflation remained elevated at 5.9 percent y-o-y, with currency depreciation, pipeline inflation from rising input prices, rising household inflation expectations (based on RBI survey), and improvement in demand conditions the core inflation pressure is likely to intensify. Urban core CPI has increased at a much faster pace than rural CPI, which signifies relatively stronger improvement in demand in urban areas vis-à-vis rural areas. This is also reflected in IIP numbers, widening Current Account Deficit (CAD) and strong retail credit growth of 16.7 percent y-o-y in July. Based on the last two months CPI reading, RBI might pause October policy with a more hawkish policy on rising currency depreciation risk.

July IIP momentum remained strong at 6.6 percent y-o-y, following the cue from last month’s reading of 6.9 percent. Both these numbers are on lower base of last year, which has been broadly on expected lines. We attribute the cyclical uptick in IIP to higher government revenue spending, depreciation in INR/USD, rising household leverage and improving income levels. IIP growth in FY19 is likely to accelerate to an average of 6-6.5 percent versus 4.4 percent in FY18; up till now the average for April-July is at 5.5 percent.

Garima Kapoor, Economist and Vice President, Elara Capital, Mumbai

“While weakness in the rupee adds to the upside risk, factors such as still sanguine domestic food prices and moderation in global commodity prices (excluding oil) is likely to provide some relief.

Annualised core inflation prints will inch lower hereon, mainly on account of supportive base. However, sequential prints may not ease significantly due to fuel price rise and rupee depreciation.

CPI inflation has so far remained well within RBI’s projected trajectory. However, concerns are building with respect to rupee depreciation and a rate hike could provide some support to the currency.

The bond market has started to price in rate hike with the swap markets now pricing in 75 bps hike over next 12 months. In this backdrop, in order to maintain financial market stability, should the rupee fail to stabilise, we do not rule out 25 bps repo rate hike in October policy review.”

--With inputs from Reuters