Overall at different points pressure on inflation has emanated from different sources to keep the headline inflation high. While it would be a tough call for RBI, as quite a few contradictory evidence has emerged in recent times including i) stagnation in industrial production and rapidly slowing GDP growth along with moderating bank credit growth, ii) still high inflation, iii) signs of fiscal correction with hike in fuel prices and iv) potential impact of QE3 on commodities inflation. While navigating through these would be challenging we see the 25bp rate cut in policy rate on September 17th policy as still possible but not imminent.
Aug-12 inflation at 7.6% was well above expectations (MOSL 6.9%; Consensus at 7.1%).
While food inflation moderated to single digit (9.1% vs. 10.1% in Jul-12) new pressure points emerged.
Non-food articles accelerated further (to 13.8% from 13.1% MoM) led by oilseeds while minerals inflation too accelerated (to 9.7% from 8.4% MoM). These two groups resulted in lower deceleration of primary articles inflation to only 10.1% (from 10.4% in Jul-12).
Fuel group inflation that had moderated somewhat unexpectedly sharp to 6.0% in Jul-12 accelerated again to 8.3%. The fuel price hike of yesterday would further add 81bp to this reading going forward.
The manufactured group inflation which so far has benefitted from an easing international commodity cycle showed signs of rising once again as it hardened to 6.1% from 5.6% a month back. Going forward, this group would display increased inflationary pressures from both a low base as well as US FED measures yesterday launching QE3 and continuation of QE2.
The Jun-12 inflation was revised up to 7.6% from 7.3% estimated earlier.
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