India’s August inflation came in slightly above expectations, mainly on the divergence in food vs ground-level data. Food prices corrected (-0.3% m/m) much less than was expected, across sub-segments like pulses, vegetables cereals, sugar etc. Other segments were along expected lines, with continued disinflation in fuel and modest service-sector pressures. Core inflation (ex-food and fuel) held steady at 3.4% yoy, pointing to modest pass-through from previous telecom tariff hikes. Diesel and petrol prices might be cut if global crude (currently at three-year low) stays soft. Brent is down 10% MTD vs FY24’s average, capping imported costs. High frequency food costs have eased further this month, and we will monitor if this is reflected in the Sep sub-trends. Either way, receding base effects were expected to push up the headline print back above 4% in Sep, with the current trend tracking a shade higher than our forecasted profile.
As highlighted in India: Slowing inflation profile and liquidity nuance, three developments will be closely watched. The four-year term of the three external members in the monetary policy committee concludes next month and new members might be named ahead of the October rate review. Two of the existing external members are doves in the MPC, casting dissent votes in favour of cuts vs the majority’s decision to keep rates on hold. Incoming members might prefer to maintain status quo in October but follow a broader MPC shift in December as more inflation and growth prints become available. Secondly, global monetary conditions are likely to get conducive as the US Fed is widely expected to deliver at least a 25bp cut this month, with the accompanying dot plot likely to be parsed to gauge their forward-looking bias. Lastly, domestic data by way of growth momentum (2QFY GDP numbers out next month), inflation in the interim and rupee stability, are important factors which will guide policymakers.
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