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Charts & Analysis

Consumer Price Inflation for Aug 2014 at 7.8%, Too High For a Rate Cut

Consumer Price Inflation for August 2014 comes in at a nice 7.80%.

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This is lower than last month, but still quite high and the "slope" of the inflation index curve shows it going up at a pace nearly as rapid as last year.

As usual, the culprit is food:

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Nearly everything else (other than "Personal Care") has fallen over the last few months. However, the "Core" CPI has fallen dramatically:

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Will RBI take this into consideration? It is unlikely they care only about Core CPI because Food inflation does impact inflation expectations. But it is heartening to see this data point, because it means inflation can be controlled by cutting food prices.

Our View: RBI does a status quo on Sep 30 on interest rates. Inflation at 7.8% is still too high for RBI to cut rates. Only if CPI sustains below 7.5% will we see the RBI trying to cut rates. Remember, RBI expected inflation to fall into November and then rise.

  • Rajan said he would not wait to cut rates until inflation reaches 6%, he is looking for the trend towards that target. But going through his interviews (reading in between lines) it appears like he would hold on to rates until the fear/effects of Fed raising the interest rates get over. When he occupied the office last year, he was saying higher rates will help preserve foreign money else they would take it away quickly when Fed acts.
    But all in all, inflation is reducing slowly and consistently (thanks to cheaper gold, oil and metals). I expect inflation (CPI) and interest rate to reduce 1% from here in an year.