India's CPI moves sharply lower on commodity prices

Consumer price inflation (CPI) in India fell to an 8-month low, to 3.8% y/y in July, down from the previous month's print of 5.4% y/y, reflecting a high base to an extent, but also much lower food inflation on a seasonally adjusted basis. Apart from lower petroleum prices, food prices also saw a slower pace of increase than seasonal factors would suggest, supported by pro-active food management by the government and strong sowing indications. Within food, while inflation for pulses remains high (22.9%), the price of sugar (-12.3%) and Vegetables (-7.9% y/y) led the softening. Broadly, apart from pulses, no other food commodity is experiencing double-digit inflation.

Core CPI was also lower, rising only 4%, down from 4.56% in June. Overall, price pressures remain manageable and, despite higher service tax from June, underlying price pressures remained contained, as underscored by non-tradables CPI which saw education and personal care inflation declining at the margin. Inflation is expected to falling further in August, continuing the trend seen in recent months and reflecting a host of factors, including better controls on food prices, persistently idle industrial capacity and a broadly stable INR. Oil prices have also softened considerably in recent weeks, and its pass through has picked up as well, which will give additional buffers for price pressures.

" We feel that the Reserve Bank of India (RBI) remains comfortably on course to achieve its early-2016 CPI target of 6%, given the current global commodity price backdrop", says Barclays.

In the near term, rainfall and agriculture crop sowing activity during the monsoon season is likely to have an influence on food prices and the overall trajectory of retail inflation in 2H FY15-16. So far, monsoons have been sub-par, tracking a deficit of 9% until 11 August. The Indian Meteorological Department (IMD) continues to forecast 88% of the long-term average rainfall for 2015. In its latest monetary policy statement in early August, the Reserve Bank of India (RBI) noted that risks to inflation are 'balanced' and the governor recently noted that the food price management has been good by the government.

In that context, the lack of an increase in MSPs in mid-July for the summer crops will help keep food inflation better anchored, as MSPs become valid from October 2015 onwards. We forecast FY 15-16 average CPI inflation of 5%. It is  believed that, the central bank is on course to deliver another 25bp repo rate cut in H2 2015, unless incoming data - for example, the monsoon - spring major negative surprises in the coming months. On the balance of risks, our expectation is now tilted towards a rate cut at the RBI's next meeting at end-September. Thus, while the RBI has rightly reiterated that its policy action will remain data dependent, a 25bp repo rate cut in September is the baseline scenario.

"Separately, India's June industrial production (IP) - released today as well - saw modest growth of 3.8% y/y, marginally above expectations a quarterly basis, Q2 15 IP growth stood at 3.2%, versus 3.4% growth in Q1 15. The IP continues to show modest gains, which are largely concentrated in basic goods, but interestingly consumer goods showed a strong improvement in June. Within consumer goods, durables led the gains, rising 16% y/y, against non-durables which rose only by 1.3% y/y. Basic goods production stayed strong at 5.1% y/y, while production of capital goods contracted (-3.6%) and intermediate goods (0.8%) also expanded y/y. However, the importance to policy-making of the current IP series remains limited, in our view, especially post release of the new GDP series", notes Barclays.