With CPI inflation above 11%, the RBI may get aggressive with rate hikes, says Nomura
India’s industrial production (IP) growth fell to -1.8% y-o-y (year-on-year) in October 2013 from 2% y-o-y in September, worse than expected. Meanwhile, CPI (consumer price index) inflation rose to 11.2% y-o-y in November from 10.2% in October, substantially above expectations. Even as CPI inflation falls, it is expected that it will remain above 9% in 2014 as well. In this context, it is clear that stagflation persists in the Indian economy. Therefore, “we expect the Reserve Bank of India (RBI) to hike the repo rate by a cumulative 50bp, taking the repo rate to 8.25% by mid-2014,” forecasts Nomura in its research note.
According to the Nomura research note, adverse base effects, lower infrastructure output growth (especially power) and weak demand led to the decline. In particular, the slowdown was led by a sharp contraction in consumer durables (-11.8% from 10.8%) and basic goods (-1.6% from 5.3%), highlighting very weak consumer discretionary spending and bottlenecks in the upstream industries. By contrast, consumer non-durable goods continued to post positive growth likely led by a combination of strong rural and export demand. Surprisingly, capital goods also posted positive growth again.
Food price inflation rose to 14.5% y-o-y in November from 12.3% in October, led by sharp pickup in vegetable prices. While we were expecting vegetable prices to rise in November 2013, the extent of the increase is very steep. Core CPI inflation was unchanged at 8.2% y-o-y in November, above Nomura’s expectation (7.9%), point out Nomura analysts.
The Nomura research note concludes by saying that it expects GDP growth to average 4.7% y-o-y in FY14 versus 5.0% in FY13 and to rise only marginally to 5% in FY15. The recent fall in vegetable prices should lower headline CPI inflation in the coming months.
The IP data and CPI inflation data are given in the following tables of the Nomura research note:
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