Barclays has projected a consumer inflation rate of 7.0-7.5% for India in the current financial year, below the 10% level seen last year, despite the threat of a weak monsoon pushing up food prices. This would allow the Reserve Bank of India more leverage in reducing rates, it said.
“The IMD (met dept) expects rains to improve in the coming months, and if the IMD’s projections materialise, we expect retail inflation – the RBI’s key focus at the moment – to average 7.0-7.5% in FY 14-15. According to the RBI, inflation could remain close to the mid-7% handle by December and about 8% by March-2015,” it said.
India’s consumer price inflation rose 7.3% year on year in June, moving to a 43-month low, and sharply lower than Barclay’s and market expectations. The consensus estimate was 7.7%, while Barclays was looking for 7.6%.
The large dip was triggered by food inflation, which slowed further in June to 7.9% year on year, despite signs of a poor monsoon. The decline in food prices was also broad-based. Core CPI inflation also moved lower to 7.4%. Within the core, housing inflation softened further, falling to 9.1% y/y from an average of 10.2% over the previous 12 months. Fuel inflation fell further to 4.6% y/y (from 6.9%, on average, over the past 12 months).
“While today’s CPI inflation print brings some relief, for the Reserve Bank of India (RBI) this year’s monsoon rainfall will remain a key variable in calibrating monetary policy, as the rains will have implications for both inflation and growth. The RBI expressed a more balanced stance in its June policy statement, in our view. El Niño-related risks cannot be discounted; if the monsoon rains fail in the coming months, concerns of higher food inflation are likely to return,” it added.
India has grappled with double digit consumer price inflation caused by 20-30% yearly rise in the prices of key commodities like onion and milk. The high inflation was a key reason for the voting out of the previous government, and the new government is eager to bring the rising food prices under control. The prices are pushed up by a cartel of traders who use modern technology to buy and store most of the stock in certain commodities.
“With a likely softer inflation trajectory, a largely stable outlook for the INR and only a limited uptick in growth momentum, we think there is greater room for a more balanced monetary policy stance in H2 14,” Barclays said.