Inflation cooled off for the first time since the last four months with its July reading at 4.17% y/y. Still, it is above the central bank’s 4% target for the ninth consecutive month. Meanwhile, core inflation moderated to 6.29% y/y in July. The slower inflation was due to slightly muted food prices, which rose 1.37% y/y in July following GST rate cuts on over 100 items, effective July 27. It should ease inflation in August since the July number does not show it completely. We now believe there is some room for the Reserve Bank of India (RBI) to take a pause on its rate hike until December at least. A sharp decline in retail inflation closer to the RBI’s 4% target will provide comfort to the central bank after two consecutive hikes to 6.50%. But the depreciation of the rupee against the USD, if it continues, will potentially feed into the CPI inflation over the near term. It could also pave the way for another rate hike during the October 5 policy meeting. The rupee remains vulnerable to the emerging market crisis given that the economy is sitting on twin deficit. The Turkey crisis saw the rupee falling to an all‐time low of 69.2 against the USD. We are looking at 69.80–70.0 levels. We feel the RBI should not be supporting the rupee given that the fall is strong across emerging markets.

• Inflation cooled off for the first time since the last four months. In July, the headline inflation rose at a slower pace by 4.17% y/y from 4.92% y/y in June. Still the reading is above the Reserve Bank of India’s (RBI) 4% target for the ninth consecutive month. Meanwhile, core inflation remained stubbornly high at 6.29% y/y in July from 6.45% y/y in June.

• The slower inflation was due to slightly muted food prices which rose 1.37% y/y in July from 2.90% y/y in June. The GST rate cuts on over 100 items came into force on July 27. We expect the impact from GST cut will be better reflected in August since the July number does not show it completely.

• Meanwhile, there is some room for the RBI to take a pause on its rate hike momentum until December at least. A sharp decline in retail inflation coming closer to the RBI’s 4% target should provide some comfort to the RBI after two consecutive rate hikes to 6.50%.

• But the depreciation of the rupee against the USD, if it continues, will potentially feed into the CPI inflation over the near term. The rupee has so far lost over 8% this year will add upwards pressure on prices of imported items like petroleum products, commodities, electronics and engineering equipment. Hence, core‐inflation is likely to stay stubbornly high.

• So another rate hike during the next monetary policy meeting on October 5 is still on the cards, pending the direction of inflation and the rupee. The rupee remains vulnerable to the emerging market crisis given that the economy is sitting on twin deficit. The Turkey crisis saw rupee falling to an all‐time low of 69.2 against the USD. We are looking at 69.80– 70.0 levels. We feel the RBI should not be supporting the rupee given that the fall is strong across emerging

Source: AmInvest Research - 14 Aug 2018