MOSL: ECOSCOPE-Odds of a rate hike in mid-2018 have increased-High inflation and low growth put the RBI in a tight spot

​ECOSCOPE: Odds of a rate hike in mid-2018 have increased; High inflation and low growth put the RBI in a tight spot

• CPI inflation surged to a 15-month high of 4.9% YoY in Nov’2017, much higher than our and market expectation of 4.3%-4.4%, and also 3.6% in Oct'17. Vegetable inflation shot up to a four-year high of 22.5%, leading to the surge in the headline number.
  
• Core CPI also moved up to 4.8% from 4.4% in Oct'17 on account of a rise in housing inflation.
  
• In a separate release, IIP grew only 2.2% in Oct'17 versus 3.8% in Sept'17, slower than our expectation of 3.8% and market consensus of ~3%. Basic goods and consumer durables led to the slowdown.
  
• Since the RBI focuses on headline CPI, a likely reading of above 6% in 1QFY19 (based on recent trends and partly driven by base effect) increases the odds of a rate hike in mid-2018. However, we still maintain our call of a prolonged pause due to weak growth and the nascent stage of investment recovery. Union Budget 2018-19 too will play a key role here.