India: Headline inflation eases, but core picks up – Nomura

Analysts at Nomura point out that India’s CPI inflation moderated below theirs and market’s expectations to 3.3% y-o-y in October from 3.7% in September, due to a contraction in food inflation; although core CPI inflation picked up above expectations (to 6.1% from 5.8%).

Key Quotes

“Medicine (non-institutional) appears to have played spoilsport, contributing majorly to the 0.35pp rise in y-o-y core inflation, possibly reflecting higher imported raw material costs from China amid a weaker rupee. Price pressures were also visible in household goods & service and personal care categories.”

“However, other barometers of core such as the trimmed mean inflation eased to 4% yo-y from 4.2% in September. Items like clothing & footwear saw prices contract m-o-m and education, which tends to be as sticky as health, saw a more muted price rise.”

“Overall, while there are signs of higher cost pass through in certain core segments, the idiosyncratic nature of the October core uptick suggests that this is not demand-driven, but a combination of lagged adjustment to weaker rupee exaggerated by the one-off medical effects.”

“We do not see higher core inflation sustaining. Cost pressures are already on a decline due to sharply lower oil prices and stable currency and recent developments among shadow banks and the impending fiscal belt tightening are yet to fully reflect in growth numbers.”

“We expect GDP growth to slow from 8.2% y-o-y in Q2 2018 to below 7% by Q1 2019, headline inflation to average ~4.5% y-o-y in 2019 and core inflation to converge towards 4.0-4.5% by mid-2019.”