Inflation: A positive surprise for the market

Inflation: A positive surprise for the market Last week the headline CPI inflation for July-15 came in sharply lower at 3.78% over the previous year as compared to 5.4% in June-15. The July CPI data was significantly lower than consensus expectations of 4.4% and the decline was not entirely due to base effect. The positive surprise came in predominantly from lower food inflation. Food inflation came in at 2.2% in July-15 as against 5.5% in June-15. Core CPI inflation - excluding food and fuel- also moderated to 4% in July-15 from 4.6% in June-15. Thus the deceleration in CPI was broad based across categories. More importantly, the momentum of core inflation slowed down in July to 0.2% month-on-month (M-o-M) (seasonally adjusted) increase from 0.5% m-o-m rise seen over the last few months. In the recent past we have been highlighting (as detailed in table below) that inflation in India is likely to moderate as all the structural drivers such as low MSP hikes and low rural wage growth, relatively stable exchange rate, crude oil and commodity price fall, have turned favourable. The latest CPI data reinforces our view that inflation trajectory going forward will be lower and undershoot RBI’s target for Jan-Mar16. This may provide room to RBI for another rate cut in the next credit policy review due on 29th September 15.

Conclusion In our opinion all the key determinants of interest rates in India viz inflation and inflation drivers, fiscal deficit, CAD, economic activity point towards lower rates. In light of the positive surprise on CPI data and the higher possibility of an expected rate cut by RBI Source : HDMC MF