India's CPI inflation accelerates, production softens

Oct CPI inflation accelerated to 5% (YoY) from Sep's 4.4% on higher food prices and fading base effects. Headline readings are off the sub-4% trough in Jul-Aug, with base effects and pipeline food pressures to keep inflation above 5% in 4Q15 and first quarter next year. 

Food price inflation quickened to 5.3% (YoY) from Sep's 4.3% and accounted for more than four-fifth of the jump in headline inflation (contribution basis). Retail data had seen prices of staples/ cereals stabilise but were more than offset by a sharp rise in pulses alongside firm vegetables. Pulses jumped 42% in Oct double the average 21.6% pace in the past six months. This component single-handedly accounted for half of the increase in the headline CPI. Below-normal rains and shifts in sowing patterns have pushed up pulses/ lentils costs sharply in the past quarter, necessitating a step-up in imports and administrative measures to quell prices. Vegetable prices meanwhile rose 2.4% in Oct, from a flat print month before. 

Amongst non-food components, inflation was broadly steady. Global crude prices remained low, which weighed on the related sub-components, especially transport and communication. The latter declined 0.4% (YoY) down from average 0.2% in Apr-Sep15. Contribution by other service sector segments also flatlined, while core CPI stabilised around mid-5%. The other aspect that is in focus is the varying pace of rural and urban inflation. Oct rural inflation rose 5.5%, outpacing urban at 4.3%, with the sub-components also revealing a stronger run-rate in the former, apart from food. This divide will add to the central bank's calls for the government to ease structural bottlenecks and improve rural infrastructure to calm rural price pressures. 

On policy, renewed concerns that the sharp rise in food prices might lift generalised price pressures and inflationary expectations, will keep the central bank from aggressively easing policy further. After the bunched-up 50bps cut in Sep and ahead of the widely-anticipated lift-off in the US rates by end-year, the Reserve Bank of India (RBI) is expected to pause in December. Trends yet far suggest inflation should remain below the central bank's 6% target in the Mar16 quarter. A downside surprise however will be necessary to renew odds for further rate cuts. 

Sep industrial production meanwhile eased to 3.6% (YoY) from 6.3% month before, down on sequential terms contrary to the expectations. The heavy-weight manufacturing sector slowed to 2.6% from Aug's 6.6% despite favourable base effects, along with subdued mining output. These components outweighed a 11.4% rise in electricity generation. On the supply-side, capital goods output continued its strong run up 23% YoY in Sep from 8% in the prior five months. Supportive base effects, lumpy and volatile nature of this sector alongside distortions from a sharp jump in insu- lated cable/rubber sub-component (punched above its weight to add +1.0ppt to headline IP), influenced the headline print. Excluding capital goods, industrial production slowed to 2.5% from 3.3% month before. 

Consumer goods output slowed on the back of a fall in non-durables, with durables also easing in tandem. Beyond Sep's weak print, the latter is expected to benefit from easing financing costs, with base effects to support year-on-year growth over the next two quarters. As urban discretionary spending turns a corner, rural demand remains benign on weak rains, lower fiscal support and subdued wage growth. This is also reflected in the upturn in passenger and commercial vehicle sales since start of the fiscal year, while two-wheeler sales weaken. Overall, notwithstanding a soft Sep print, on 6MMA basis, manufacturing output continues to edge up this year. Factory output is expected to turn in a 4-5% growth this year from 2.8% in FY15 and back to four-year highs.