MOSL: ECOSCOPE-August inflation doesn’t dampen case for rate cut-Monetary policy support necessary to revive weak economic activity

​ECOSCOPE: August inflation doesn’t dampen case for rate cut; Monetary policy support necessary to revive weak economic activity

• With India's retail inflation more than doubling from 1.5% YoY in June 2017 to 3.4% YoY in August 2017, it is broadly believed that the rate cut window has probably closed. However, details of CPI reveal that the entire rise in headline inflation is driven by three items - vegetables, fuel for vehicles, and housing. Excluding these, inflation in August was the same as in June 2017 at 2.7%.
  
• The uptick in these three items can be attributed to seasonal, global developments, and statistical effects, respectively, rather than any structural bias. Consequently, they should be avoided in policy-making considerations.
  
• Meanwhile, economic growth has visibly weakened, which is likely to be reflected in RBI's revised forecasts next month. Private investments need desperate policy support and ~90% of the economy grew sub-4.5% for the second consecutive quarter in 1QFY18. Accordingly, we believe that recent inflation readings don't dampen the case for rate cuts. In fact, weaker-than-expected economic activity needs monetary policy support, as fiscal push is unlikely.