According to Nomura, the significant undershooting on inflation in 2015 is opening up some room for policy easing, but this room is very limited and the RBI may remain on prolonged pause during its policy meeting next month

India's inflation based on consumer price index (CPI) eased to 5.5% in October from 6.5% in September mainly on favourable base effect in food inflation. Nomura feels beyond November, the CPI inflation would bounce back to 6.0% to 6.7% in first quarter of 2015 and the Reserve Bank of India (RBI) is likely to remain on a prolonged pause in its next policy meeting on 2nd December.

"Although the lagged impact of the growth slowdown, lower rural wages, low minimum support price increases and higher real rates should result in continued disinflation into 2015 with CPI inflation falling below the RBI's 6% target set for January 2016 by the central bank, in mid-2015," it said in a note.

Nomura says, "The recent moderation in CPI inflation and our expectation of continued disinflation in 2015 does not change our view on monetary policy. In our view, the RBI is focused on ensuring that inflation remains low even as the growth cycle starts to pick up in 2015-16. As we highlighted last month, the significant undershooting on inflation in 2015 was opening up some room for policy easing, but this room is very limited. For now, we expect the RBI to remain on a prolonged pause, including at its next policy meeting on 2nd December."

Recent reports suggest that delayed harvesting is resulting in an increase in vegetable prices in November. However, base effects are very positive, which should result in an under-5% CPI inflation reading.

A gradual industrial recovery is under way

Industrial production (IP) growth rose to 2.5% in September from 0.5% in August. On a seasonally adjusted basis, IP rose 1.5% m-o-m after contracting in the previous three months. Nomura says, "In our view, part of the rebound in IP reflects increased production ahead of the festive season in October. Much of the rebound was due to the volatile capital goods segment. Except capital goods, IP growth moderated as a result of still weak consumer durables output growth, partly because of the shutdown of a mobile handset plant and also muted consumer non-durable goods output growth, lower agriculture-related production."

Industrial output growth is likely to weaken in October owing to there being fewer working days in October 2014 (19 working days) than in October 2013 (24).

"However," Nomura said, "We remain optimistic that a gradual recovery in industrial growth is under way. Other high frequency indicators such as auto production, visitor arrivals and non-oil non-gold imports indicate that domestic demand is picking up. Leading indicators such as the OECD's composite leading index for India also continue to suggest that industrial production growth should pick up in the coming quarters."