India’s headline CPI rises in October, but core remains stable

Consumer price inflation (CPI) in India for October stood at 5.0% y/y, a modest upside surprise, recording a c.60bp uptick from the September print of 4.4% y/y. Even with the uptick, underlying inflation remains in check. Core CPI in October remains manageable at 4.14% y/y from 4.05% in September, yet it remains considerably below historical averages.

Inflation in food and beverages (weight c.46%) was 5.3% y/y, with rises mainly in pulses, cooking oil and vegetables such as onions. The lack of broad-based food price increases reflects the pro-active food management by the government, even in the face of a poor monsoon. Within food, while inflation for pulses continues to climb higher (42% y/y), the prices of sugar (c.-10.5%), dairy products (c.4.8%) and cereals (1.5%) continues to lead the softening, stretching into November as well. As such, with reversal in onion prices and potentially even pulses. Economists feel that potential upside risks to the H2 FY 15-16 inflation trajectory has softened materially in recent months. In fact, in the Reserve bank of India's (RBI) latest monetary policy statement on 29 September, it lowered its March 2016 CPI inflation forecast by c.20bp to 5.8%, moving closer to forecast of 5.7%.

Disinflation in India remains strong and broad-based, which has allowed the Reserve Bank of India (RBI) to cut the repo rate 125bp YTD, including 50bp in its most recent monetary policy meeting in September. Retail inflation (CPI) looks set to average c.5% during FY 15- 16, considerably lower than its long-term (15-year) average of 7.3%. Fundamental factors - such as markedly better food price management, sustained idle industrial capacity, softer commodity prices and a largely stable INR - augur well for inflation likely staying anchored in 2016 as well.

"We see little sign of demand-driven inflation. The RBI continues to emphasise that its future actions will remain data-dependent. Accordingly, we think a prolonged period of softer inflation and moderation in inflation expectations - which remains likely, in our view - will offer space for further monetary easing. We forecast another 50bp of repo rate cuts during H1 16.",says Barclays.

Separately, India's September industrial production (IP) - released today as well - recorded decent growth at 3.6% y/y, beating the expectations of 3.0% but below consensus expectation of 4.9%. Fiscal year-to-date growth in IP now stands at 4.0%, compared with 2.9% in 1H FY14-15. This strong uptick in IP was driven largely by the production of consumer and capital goods and signals a steady build-up of inventories ahead of the festive season in October-November.

"The importance of the IP prints of late had been relatively limited, in our view, especially following the release of the new GDP series. Nevertheless, the IP series has recorded some improvement in recent months as IP y/y growth points to a broadening economic growth recovery in India, which remains in its nascent stage", added Barclays.