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Analysts Expect More Pressure After Macroeconomic Double Whammy  

Both the November CPI and October IIP data has given a negative surprise to the street.

Analysts Expect More Pressure After Macroeconomic Double Whammy  

Both the November consumer price inflation and the October index of industrial production numbers have surprised brokerages negatively. While the CPI was above expectations at 15-month high of 4.88 percent, industrial output growth remained below expectations; slowing to a three-month low of 2.2 percent.

In their base case, brokerages expect the Reserve Bank of India to continue to stay on pause, while becoming more watchful of the inflation trajectory.

Here’s what some of them highlighted in their reports:

IDFC

  • Vegetable inflation played spoilsport, rising 22.5 percent in November, compared to 7.5 percent last month.
  • Now estimate the core inflation to remain at levels closer to 5 percent for the rest of FY18, while the stabilising factor for headline CPI could be relative dips in the vegetable prices with winter vegetable supplies to hit the market soon.
  • The latest inflation print vindicates the continuing caution aired by the RBI on the evolving inflation trajectory.
  • Expect the headline CPI inflation to remain higher than 5 percent for the remaining part of FY18.
  • This surely removes any chance of a softer monetary policy from the RBI.
  • But do not see the RBI raising the repo rate in the first six months of calendar year 2018, given that growth momentum is still not strong enough yet.
  • Base case - RBI continue to stay on pause.

Nomura

  • India’s macroeconomic data disappointed.
  • The rise in core inflation, even adjusting for house rent, suggests broad-based price pressures are continuing, even as the GST effects have faded.
  • Below estimated IIP growth reflects a number of transitory factors like front-loaded shipments in September and early onset of festive season.
  • Broadly, data suggests upside risk to inflation forecast.
  • Expect November industrial output growth to rebound, but inflation pressures are likely to sustain.
  • Expect rates on hold from RBI has a sufficient real rate cushion,
  • A continued rise in core inflation is a risk to forecast of status quo on policy.

Motilal Oswal

  • Since the RBI focuses on headline CPI, a likely reading of above 6 percent in Q1FY19 (based on recent trends and partly driven by base effect) increases the odds of a rate hike in mid-2018.
  • Still maintain call of a prolonged pause due to weak growth and the nascent stage of investment recovery.
  • Union Budget 2018-19 will also play a key role here.

The yield on 10-year government paper has already risen 39 basis points since the start of November on rising concerns on inflation, fiscal slippage, waning liquidity surplus and oversupply of paper in the bond market. It rose four basis points to 7.25 percent today in early trade.