India inflation slips to a measly 9.86%

Looks like fuel inflation created by hike in administered prices delivered positive effects.

According to Nomura, India‟s CPI inflation (base year 2010) moderated to 9.86% y-o-y in July from 9.93% in June. The moderation was mainly due to positive base effects on fuel inflation created by the hike in administered prices a year ago (7.4% y-o-y in July from 10.3% in June) and a moderation in the miscellaneous category because of a decline in the cost of transportation services. As a result, core CPI inflation (ex-food and fuel) moderated to 8.9% y-o-y from 9.2%.

Here's more from Nomura:

Food inflation inched higher to 11.5% y-o-y in July from 10.8% in June due to rising prices of cereals and pulses. This contrasts with the fall in food inflation in the WPI and suggests that lower wholesale prices may not be translating into lower consumer prices.

We believe the moderation in July CPI inflation – like the fall in July WPI inflation –may not be sustainable for the following reasons: 1) food prices will likely continue to rise because of poor rainfall during the monsoon season (food comprises 43% of the CPI basket); 2) fuel inflation remains suppressed due to an incomplete pass-through of fuel prices to end users, and any hike in administered prices in the coming months will increase inflation.

From a policy perspective, the Reserve Bank of India does not rely solely on this CPI series due to its limited history. However, this is an important input as it reflects inflation faced by households. Today's slight moderation is positive, but CPI inflation is still close to double digits. We expect all policy rates to remain unchanged for the remainder of 2012 and 50bp of rate cuts in H1 2013.