India: inflation continues to accelerate, setting the stage for an RBI hike :JPMorgan

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India: inflation continues to accelerate, setting the stage for an RBI hike

Inflation continues to accelerate in August printing at 9.8% oya, slightly higher than market expectations and significantly higher than July’s 9.2% print Core inflation, too, continues to accelerate sequentially at an uncomfortable pace suggesting that pricing power has not abated Furthermore, input prices rise sharply in August thereby likely adding to the pressure on output prices in the months to come In contrast to previous months, June headline inflation is revised up only 7 bps in the final print, but core inflation is revised up 50 bps With inflation continuing to remain significantly above policymakers’ comfort zone, and no signs that pricing power is abating, the RBI is expected to raise policy rates by another 25 bps at its review on Friday   August inflation continues to accelerate and the details are sobering   Inflation predictably continued to accelerate in August with the headline rate printing at 9.8 % oya (0.7 % m/m, sa) significantly higher than July’s 9.2% print and slightly higher than expectations (Consensus: 9.6%oya, JP Morgan: 9.7%.)   The details were equally sobering. Reversing their declining trend over the last few months, domestic manufacturing input prices increased sharply on a sequential basis in August, reflecting the fact that (i) global commodity prices hardened in the second half of August and (ii) the INR depreciated more than 4 percent that month likely increasing the domestic prices of imported goods and commodities. As a consequence, non-food primarily articles increased 2.8 % m/m, sa (17.8 % oya) and minerals increased 3.1 % m/m, sa (23.4 % oya) in August. Food and energy prices, too, continued to increase sequentially, albeit at a slower pace (about 0.5 % m/m, sa). These increases are in line with the surge of input prices in the August manufacturing PMI and all of this is likely to pressure output prices and core inflation further in the weeks to come.         Core inflation continue to remain elevated; no sign that pricing power has abated   Not that core inflation needs any further provocation. Non-food manufacturing prices continued to accelerate on a sequential basis, growing at 0.5 % m/m, sa, the highest sequential increase in the last four months. While this is lower than the 1% month-on-month surges witnessed earlier in the year, it is still higher than policymakers’ stated comfort zone. The latest sequential increase meant that core inflation’s year-on-year rate rose further to 7.7% oya from 7.5% the previous month – almost twice its historical average. Furthermore, it is likely to be revised upwards when the final estimates for August are released, as was the case in June (see below).   We have long maintained that while the economy may be slowing, it is doing so gradually, and hasn’t slowed enough to reverse entrenched inflationary pressures. Yet, markets continue to fear that activity is falling off sharply and these concerns were exacerbated after Monday’s misleading headline IP print (see, “India: IP plunges but it’s not as bad as it looks,” MorganMarkets, September 12, 2011). As a consequence, the notion that pricing power is fast evaporating has been gaining ground. The sequential accelerating of manufacturing prices in August, however, tells a very different story.       June headline revised up only 7 bps; but core revised up 50 bps !   In contrast to the sharp retrospective upward revisions witnessed over the last few months, the June headline rate, in a pleasant surprise, was only revised up 7 bps from 9.44 % to 9.51%. But if one were to get an impression that revisions across the board were more muted – suggesting greater stability of the initial print -- the impression would be misleading. Instead, the headline revision was relatively muted because relatively large revisions across primary articles and manufactured products occurred in opposite direction and thereby offset each other.   Specifically, almost all categories of primary articles (food, non-food, minerals) witnessed relatively sharp downward revisions. In contrast, and more worryingly, manufactured products saw sharp upward revisions. This was particular true of non-food, manufacturing (RBI’s proxy of core inflation) which was revised up 50 bps from 7.2 % to 7.7 % oya – another indication that core pressures remain firmer than many market participants had believed.     RBI set to hike rates by 25 bps on Friday   Today’s inflation print is likely to be the straw that breaks the camel’s back, inducing a 25 bps rate hike by the RBI at it’s mid-quarter review on Friday, September 16. The central bank has been quite explicit in its previous reviews that it needs to see a sustained downturn in headline and core inflation to change its stance. Far from moderating, inflation accelerated across the board in August. Additionally, the sharp upsurge in input prices in August does not augur well for output prices in the future.   This is not surprising since the slowdown in activity is gradual. Leading indicators certainly point to the slowdown becoming more pronounced in the months to come. For now, however, activity is far from collapsing. This shows up in the continuing strength of non-oil imports and indirect tax collections in August and even in IP growth – ex capital goods -- which slowed only gradually through 2011. In sum, activity has not slowed enough to erode pricing power – clearly evident in today’s inflation print. For these reasons, and in contrast to other central banks in the region, we believe the RBI will stay on course this Friday.