India Economy - CPI inflation - Inflation to harden till Jan'16: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist - AnandRathi Financial Services) on India Economy - CPI inflation - Inflation to harden till Jan'16

CPI inflation in Oct'15 climbed to 5%, as we had anticipated. Hardening food inflation comprised most of the rise. Pulses persisted in high inflation, while vegetable and fruit inflation began inching up. Fuel inflation, which lately has been volatile, was unchanged. The first estimate of the kharif and rabi crops show better production than last year. We note that the adverse impact of the 13.9% rainfall deficiency has been contained. If the CPI meets the RBI inflation target, another 50- to 75-bp rate cut in 2016 is likely.

Performance. In Oct'15 CPI inflation rose to 5%, from Sep'15's figure of 4.4%, as food inflation soared to 5.2% (vs. 3.9%). Fruit and vegetable inflation inched up to, respectively, 2% and 2.4. Fuel inflation was unchanged at 5.3%. Paan, tobacco inflation came at a high 9.5%. Services inflation hardened a fraction to 3.7% (vs. 3.6%). Non-core inflation, however, at 5.2%, came at a four-month high. Core inflation also inche d up slightly to 4.8%. Ytd inflation was a comfortable 4.6%.

Assessment. The rise in inflation was in step with expectations. The impact of the favourable base has been exhausted, and this is driving up the figures. While the index has climbed gradually since the beginning of the year, it was the favourable base which held inflation below 4% during Jul-Aug'15. The subsequent rise again stems primarily from the unfavourable base. Two components, pulses and onion, are exhibiting very high inflation levels. Sugar products continue in deflation. We record a hardening of inflation in personal-care products. The lagged impact of low crude prices has kept transport and communications in deflation.

Outlook. Despite the 13.9% rain deficit in 2015, the initial estimates of area sown have risen from last year. Additionally, the first estimates of the rabi and kharif crops show that production levels would rise from last year. MSP announced for the rabi crop has ranged between 5% and 8%. Given the low MSP growth for the kharif crop, we expect food inflation to be low. In the short run, however, CPI inflation is likely to harden, as the impact of the favorable base has been exhausted. Low crude prices, which might not reduce fuel inflation, are likely to keep transport and communications inflation in negative territory. If crude rebounds, the decelerating trend in core inflation may be arrested.

Recommendations. The RBI expects inflation in Jan'16 to come at 5.8%; inflation below this would provide the RBI room to further cut rates. Also, we see inflation hardening from now and likely to peak in Jan'16. Our estimate is 5.7% during Dec'15-Jan'16. Since MSP growth has been low, inflation is likely to be around 5% for the next two years. If this downshift plays out, scope remains for another 50- to 75-bp rate cut in 2016.

Source : Equity Bulls

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