India: August rate hike likely on elevated core – Nomura

Analysts at Nomura note that India’s CPI inflation rose to 5% y-o-y in June from 4.9% in May, lower than expected (Consensus: 5.3%, Nomura: 5.2%).

Key Quotes

“The (lower) surprise was mainly in food price inflation, which moderated to 2.9% y-o-y in June vs 3.1% in May, led largely by a sequential moderation in fruits and the usual glut-led deflationary pressure in pulses. Indeed, food price inflation has risen less than usual so far this year. However, fuel inflation rose to 7.1% y-o-y in June from 5.8% and core inflation (CPI ex-food & beverages, fuel) to 6.6% from 6.3%.”

Core momentum sticky and uncomfortable: The pick-up in core inflation is partly owing to base effects, but the sequential momentum remains elevated. Seasonally adjusted, we estimate that “super core” inflation (CPI ex-food & beverages, fuel, housing rent, petrol and diesel) rose by 0.46% m-o-m in June, still elevated, albeit marginally lower than the average of 0.63% m-o-m in the past three months. Core pressures were particularly significant in the non-tradable services categories of recreation and education. On a year-on-year basis (Figure 4), trimmed mean inflation rose to 4.8% (from 4.7% in May) and super core to 5.7% (from 5.4%).”

August hike and then a pause: The continued build-up in core inflation momentum and government policies designed to raise food price inflation are a concern, and we expect the Reserve Bank of India to deliver another 25bp rate hike at its 1 August policy meeting. Beyond August, though, we expect slower growth and a gradual moderation in core inflation to lead to a policy status quo.”

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