Arvind Chari, Investment Adviser, at ACPI Investment Managers comments on the recent Indian CPI figures…
The Indian CPI for October settled at 5.5%, below what many were anticipating. Following the trend in CPI over the summer, which fell 1% a month since July, November’s CPI is likely to be close to 4.5%.
 
Although a substantial year-on-year impact is due to the base effects of vegetables and fuel, there has been a deceleration in overall inflation. The decrease in year-on-year inflation is due to the slower month-on-month growth shown by food and core CPI items.
 
This trend will play out as lower rural wages and muted increases in the minimum support price. Along with a better monsoon season than expected, these factors will put a lid on food prices for the month. More broadly, an overall dis-inflationary trend has been caused by three years’ lower economic growth, higher inflation and a tighter monetary policy.
 
CPI inflation is on track to achieve the Reserve Bank of India’s target of 6% by January 2016, despite post-November increases caused by adverse vegetable base effects.
 
The RBI will likely resist market calls to cut rates in November, when inflation is expected to drop and will instead wait for clarity on the sustainability of inflation. As the Budget will take place in February, we are unlikely to see any rate cuts before April.
 
Until then, bond yields, we believe, will remain soft and will trade in line with more favourable supply/demand dynamics going forward, as well as the anticipation of rate cuts in 2015. However, those expecting rate cuts based on the current inflation number are likely to be disappointed.