September 2017 Consumer Price Index or CPI inflation is likely to come in at 3.45% YoY, a tad higher than 3.36% in the previous month. Fruit and vegetable prices, among the primary drivers of inflation in the past two months , have witnessed some moderation, but the rise in fuel prices and pick-up in core inflation should push headline inflation slightly higher.
Core inflation (inflation excluding food and fuel, but including petrol) is expected to rise to 5.0% from 4.5% in the previous month, partially on account of higher housing inflation , reflecting the hike in house rent allowance (HRA) recommended by the Seventh Central Pay Commission (7th CPC) and also because of higher petrol prices and price adjustments post implementation of Goods and Service Tax or GST. Wholesale Price Index or WPI inflation is also likely to witness a slight moderation to 3.1% in September 2017 from 3.2% in the previous month on account of correction in the prices of fruits and vegetables.
However, core WPI inflation is likely to rise to 1.8% YoY from 1.7% in the previous month as past increases in commodity prices and rise in fuel prices exert upward pressure on manufacturing costs. The Index of industrial Production or IIP is likely to come in at 3.5% YoY for August 2017, up from 1.2% in the previous month.
We do not see much room for monetary policy accommodation, with inflation now on a rising trajectory. Incoming data also suggests that growth is bottoming out, although the recovery is likely to be slow and uneven. However, should growth or inflation surprise significantly on the downside, the Reserve Bank of India or RBI may signal its growth-supportive stance with a 25bps cut in key rates.
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