The inflation numbers surprised positively with the July print coming in at 6.87%. But the data were not as benign as first blush would suggest. The lagged impact on June’s sharp fall in oil prices, which has since partially reversed, was the key driver.
Core inflation (non-food manufacturing), however, picked up (5.4% y-o-y vs. 4.9% in June) and also rose in seasonally
adjusted sequential terms; 0.8% m-o-m sa (vs. 0.6% in June) and 6.9% 3m/3m saar (vs. 3.4% in June).
Non-Food Articles rose significantly to 13.1% from 6.8% YoY last month, primarily driven by sharp rise in price of oilseeds. YoY trends in food articles eased to 10.1% vs 10.8% in July due to lower prices of vegetables and tea which offset higher prices of rice and pulses. With the poor monsoon likely to ensure that food inflation re-accelerates smartly in the balance of the year, today’s better than expected data are simply a temporary lull in inflationary pressure.
What this means is that the RBI should not take comfort in today’s inflation surprise. It was driven by base effects, and the key thing to focus on is the rise in core inflation and the upside risks to inflation going ahead. The RBI would also like to relatively soon see decisive steps on fiscal consolidation and structural reform implementation before considering any further rate cuts.
Nonetheless, despite inflation likely to remain well above the RBI’s medium-term target of 4%-5%, we expect P. Chidambaram, the dynamic Indian Finance Minister to influence a 50bps rate cut in FY13 due to the deceleration in growth.