India's core price pressures under control for now

Declining primary and fuel prices drove the fall in inflation.

DBS Group Research noted:

Inflation (Jun, yesterday) registered 7.25% (YoY), well below expectations of 7.6% (YoY). In sequential terms, this works to a price rise of 3% (MoM, saar) or 7.5% (3m/3m saar). Upward revisions to April data mean the sequential moving average inflation (3m/3m saar) is actually close to our original expectations.

A fall in primary and fuel prices drove the drop in inflation. Primary prices actually fell by 8% (MoM, saar) while fuel prices fell by 30% (MoM, saar), reflecting the decline in international oil prices. Manufacturing WPI ex-food, a proxy for core, was within expecatations at 2% (3m/3m saar).

All in all, the data underscore the point that core price pressures are at present under control for now. This also sits well with the moderation in economic growth. GDP after all grew by just 6.5% in 2011/12 (Apr-Mar) and we expect more sub-par performance in 2012/13 with growth of just 6.2%.

With production data believed to be signaling a sharp slowdown and core inflation under control, the RBI is likely to lower policy interest rates by 25bps to 7.75% at the upcoming end-July policy meeting and probably by another 25bps at the meeting in mid-August. We expect the policy repo rate to stand at 7.50% by end-September, implying a 100bps reduction in interest rates this year. This is material but only a fraction of the hikes in the rate hiking cycle.