India's CPI inflation slows to 6.5% YoY in September

Thanks to favourable base effects.

India's September CPI inflation slowed to 6.5% YoY, compared to the consensus at 7.1% and Aug’s 7.7%, helped also by favourable base effects.

According to a research note from DBS, price pressures eased across-the-board, with the most notable slowdown in the food price inflation to 7.6% from 9.2% the month before.

High frequency data in the run-up had seen vegetable prices (average of three widely used varieties) moderate sharply to 8% YoY from 23% in the prior two months.

Core CPI inflation also pulled back to 5.9% in Sep from Aug’s 6.9%, a fresh low for the series. This points to still subdued demand side pressures and disinflation in the service sector categories.

Here’s more from DBS:

The index reflecting medical care, recreation, education (etc.) inflation grinded lower to 4.7% from 6.7% average in the Jun quarter.

Waning imported price pressures also helped, as the impact of the slight rupee depreciation was more than offset by easing global crude prices.

Brent crude prices dipped to a near two-year low by late-Sep (and have tumbled since), undershooting the Reserve Bank of India’s (RBI) baseline assumptions for the inflation outlook.

In sum, gradual disinflation is underway, with the downswing also helped by favourable base effects.

This reading poses downside risks to the Nov CPI reading, which might ease to sub-6% level, but grind past 7.0% by the Mar15 quarter.

Pressure is likely to build on the RBI to respond to the pullback in the Sep CPI inflation, but the central bank is unlikely to shed its cautious stance as yet.

With an eye on anchoring inflationary expectations and ensuring medium-term stability, the RBI is likely to look through these swings.

In addition, influence of base effects over the next two months, upcoming changes to the monetary policy framework and an anticipated recovery in aggregate demand (in absence of measures to ease supply-side bottlenecks) will convince the RBI to remain on a prolonged pause on rates in FY15.