India's disinflation remains significant and broad-based

India's Inflation has softened considerably since 2014. Retail inflation (CPI) has averaged 4.8% y/y in 2015 YTD, significantly below the RBI's target of 8% in early 2015. The current softening in inflation had been broad-based, reflecting better food price management, lower commodity prices, persistent idle industrial capacity, and a largely stable INR. 

Core CPI inflation in August reached 3.8% y/y, the lowest level in more than seven years. With renewed weakness in commodity prices, inflation in India is expected to stay lower for longer. Admittedly, near-term CPI prints appear set to move up c.100bp or more from the July-August lows. 

"Nevertheless, it should not be a surprise and any material risk is not seen for the expectation of average CPI inflation of c.5% during FY15-16, markedly lower than the RBI's 2016 target of 6% and India's long-term average of 7.3%", says Barclays.

The drop in inflation in terms of the wholesale price index (WPI) has been far sharper, recording contractions for 10 consecutive months since November 2014 and hitting a nearly four-decade low of -5.0% y/y in August (3mma: -3.7% y/y), in sharp contrast to its long-term average of +5.8%. 

"WPI inflation will likely remain in negative territory for the remaining months of 2015. However, despite consecutive negative WPI inflation prints, concerns of deflation remain muted in India, given the generally strong demand base, structural upside bias in agro prices reflecting perennial supply issues, sticky services inflation, and downward rigidities in inflation expectations", added Barclays.