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India Economy: Data Release; CPI Oct-19 - Growth vs Inflation debate to intensify

Oct-19 CPI hardened by a strong 63bpmom to 4.6%yoy. The up-move in CPI is led by food prices (primarily vegetables followed by pulses) and this contributed to sharp strengthening of rural food inflation too. On the other hand, core inflation eased by a significant 47bpmom to 3.8%yoy. A continued sharp rise in headline CPI is a matter of concern as it constricts the monetary easing space with RBI. Unfortunately, base effect in H2FY20 may not favor inflation trajectory much either, at least till Jan-20 and H2FY20 inflation may breach RBI inflation target of 3.6%yoy, significantly.  While, some respite may come from seasonal easing of vegetable prices in winter, it may not be enough. Moreover, a reasonable possibility of fiscal slippage in FY20 could keep inflation expectations high for H1FY21. However, an easing core inflation continues to point towards negative output gap in the economy and high frequency data continues to corroborate need to support growth. These opposing data-points would sure reflect in MPCs discussion and we believe MPC may choose to take a pause in December as marginal benefit of rate cuts towards reviving growth continues to come off and upside risk to inflation may outweigh the incremental benefit of rate cut for growth. Hence, we believe growth will need support through a fiscal route rather than a monetary route. After December, MPC will meet again in February, which will be after the annual union budget, thus providing MPC with enough data points to decide on future rates trajectory. Also, in light of fiscal concerns, we expect 10 year yield to remain sticky and yield curve to retain a steepening bias.

Summary of data release

• CPI print for Oct came in at 4.6%yoy, higher than consensus expectations of ~4.3-4.4%yoy. Oct-19 CPI strengthened 63bp on a mom basis.
• The rise in CPI has been led by base effect as well as vegetable and pulses prices. This led to hardening (278bpmom) in food inflation to 7.9%yoy.
• Interestingly, the strength in prices in rural food prices series continued (this series was muted till Aug-19), consequently rural food inflation stood at 6.4%yoy, against 3.2%yoy last month. This indicates a good price recovery for vegetable and pulses farmers, which could be a positive take away from overall weak data.
• While vegetable prices tend to be seasonal and are expected to come down as winter kicks in, we believe pulses prices may exhibit some of bit stickiness as pulses output has been on a downward trajectory in last two years. Pulses prices may present a more significant concern to headline inflation in medium term, especially when compared with vegetable prices, which are more seasonal in nature.
• For Oct-19 as well, fuel and light inflation remained in deflationary zone. 

·      Core inflation saw easing by 47bp mom to 3.8%yoy and this was the lowest print since series got rebased to 2011-12. Miscellaneous segment contributed to bulk of easing in core inflation. Weakness in Core CPI is exhibiting a weak pricing power for manufacturers led by overall bleak economic backdrop.