India’s headline inflation problematic at 9.72% in September

At a headline level, inflation remains problematic. September's print was 9.72% yoy (August: 9.78% yoy) with the underlying mom seasonally adjusted increase of 0.7% being the highest in the last six months.

Much of the increase was however, accounted for by food and fuel. Primary food prices increased 9.2%, only a tad lower than in August) whereas fuel prices were up a solid 14.1% yoy. The rise in fuel segment reflects a combination of revisions in electricity tariffs as well as the INR depreciation induced rise in the cost of imported crude oil.

The encouraging feature (from an inflation standpoint) was that core inflation is starting to level off. It came in at 7.6% yoy compared with 7.7% yoy in August. The stability of core inflation at a time when fuel prices are rising suggests that corporates are finding it difficult to pass on costs in an environment of slowing demand. Our view of slowing demand is also evident in a range of indicators such as industrial production, currency held by the public and excise duty collections.

Overall, the macro data over the last two months clearly validates that the rate sensitive segments of the economy such as manufacturing are responding to the tightening cycle. In fact, based on the data alone, the response has actually been large.

We therefore, maintain our view that the RBI will pause at its next review later this month. In its previous review, the central bank had stated that domestic demand should start to respond to past rate hikes – this has happened.