August inflation met the Reserve Bank of India's (RBI) mid-term target of 4%. The target was last met in October 2017, when CPI inflation came in at 3.58%. We found the inflation in August cooled for the second month to 3.69% y/y from 4.17% y/y in July. Meanwhile, the core inflation was at 6.0%y/y compared to 6.3% y/y in July.

We feel the latest inflation data will provide some breathing space for RBI to hold the policy rate at 6% in the coming MPC meeting on October 5. This comes about after the RBI engaged into a “back-to-back” rate hikes in its last two policy meetings by a total of 50 basis points to 6.5%, while warning about inflationary pressures. Although weakness in the rupee remains a concern as it will add upside risk though factors like a still sanguine domestic food prices and moderation in global commodity prices (excluding oil) will provide some relief.

• August inflation met the Reserve Bank of India's (RBI) mid-term target of 4%. The target was last met in October 2017, when CPI inflation came in at 3.58%. We found the inflation in August cooled for the second month to 3.69% y/y from 4.17% y/y in July. Meanwhile, the core inflation was at 6.0%y/y compared to 6.3% y/y in July.

• Although the transportation prices rose to 8.47% y/y in August from 7.96% y/y in July driven by higher crude oil prices, the upside on price pressures was pulled down by softer food prices. Food prices rose 0.29% y/y in August from 1.37% y/y in July, partly supported by the recent cut in GST rate over 100 items.

• Meanwhile, the RBI engaged into a “back-to-back” rate hikes in its last two policy meetings by a total of 50 basis points to 6.5%, while warning about inflationary pressures. We feel the latest inflation data will provide some breathing space although weakness in the rupee remains a concern as it will add upside risk though factors like a still sanguine domestic food prices and moderation in global commodity prices (excluding oil) will provide some relief.

• Hence believe RBI may now stay status quo on rates in the coming monetary policy committee (MPC) meeting on October 5. But this could be a temporary relief as weakening rupee remains on the card driven by the given the ongoing noises like emerging market crisis and trade war. The currency’s vulnerability is due to twin deficits, high short-term external debt and heavy reliance on imports for their fuel needs (crude oil and hydrocarbon).

Source: AmInvest Research - 13 Sept 2018