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MOSL: ECOSCOPE-Macroeconomic data set the stage for a rate cut-Impending MSP hike, along with farm loan waiver, a risk to monetary easing

​ECOSCOPE: Macroeconomic data set the stage for a rate cut; Impending MSP hike, along with farm loan waiver, a risk to further monetary easing

• Like in the past few months, CPI inflation eased more than expected in May 2017 to 2.2% YoY, lower than market consensus of 2.4% and our expectation of 2.7%. Although food prices (-1% YoY in May) were the key driver of lower inflation, we note that the deceleration was broad-based.
  
• Further, the index of industrial production (IIP) grew 3.1% YoY in April, higher than our estimate (and market consensus) of 2.7%, driven primarily by pharmaceutical products.
  
• In the first 12 days of the 2017 south-west monsoon season, rainfall has been 18% higher than the long-period average (LPA), and Kharif sowing has also begun well (+12.5% YoY as of 9 June 2017). Further, while farmers have been on strike over the past few days in some states, daily price data from the Department of Consumer Affairs (DCA) do not show any material increase in vegetable prices.
  
• Accordingly, we expect headline inflation to ease further to 1.8% YoY in June 2017, increasing the likelihood of a rate cut by the Reserve Bank of India (RBI) in its August 2017 meeting. However, impending minimum support price (MSP) hikes following the wave of farm loan waivers by some states may pose a risk to further monetary easing.