MOSL: ECOSCOPE-Vegetables drive CPI inflation higher in August-Case for a rate cut remains

​ECOSCOPE: Vegetables drive CPI inflation higher in August; Case for a rate cut remains, with a likely cut in GDP growth forecasts

• As against our expectation of 3% and market consensus of 3.2%, CPI-based inflation stood at 3.4% YoY in August 2017, primarily driven by higher vegetable prices. Excluding vegetables, inflation was subdued at 3.1%, only slightly higher than the six-year low of 2.9% in the previous two months.
  
• IIP, on the other hand, grew 1.2% in July, lower than our expectation of +2% and market consensus of +1.6%. Output of consumer durables and capital goods remained weak.
  
• Overall, we expect inflation to be ~4.5% in March 2018 and average 3.5% for FY18. Furthermore, the market has converged with our view that 7% GDP growth is unlikely. The RBI too is expected to cut its GDP growth forecasts.
  
• Whether or not the RBI cuts rates will depend on if the focus shifts from inflation to GDP growth. We believe that inflation is likely to remain under 5% for FY19, but growth may come under pressure. Thus, there is sufficient room for another rate cut, in our view.