India Economics:Steady inflation creating room for Dec rate cut

Steady inflation with deceleration in food prices…: September CPIinflation remained steady at 3.28%YoY (same as August), against anexpectation of an acceleration (Bloomberg consensus at 3.5%). The surprisewas led by a lower-than-expected rise in food prices and also a muted rise incore inflation compared to the last 2-month trend. We see the inflation data asmarking the near-term peak in the current uptrend. Indeed, high frequencyfood prices for October indicate a moderation, which coupled with the recentreduction in fuel prices (led by a reduction in tax rates) should lead to a lowerinflation print for October (our estimate at approx.. 2.8-3%).

    … increases probability of a rate cut in Dec policy review, in line withour expectation: We believe that the balance of risk tilts in favour of a 25bprate cut in the Dec policy review given that inflation will likely hover at a lowerlevel in 2HFY18 closer to 3-3.75% compared to RBI’s expectations of 4.2-4.6%. As we have highlighted before, keeping real rates at the upper end ofthe 1.25-2% band amidst a weak growth outlook may not be warranted. Wedo not envisage any meaningful price pressures emerging, given the benigntrend in the drivers of inflation