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Charts & Analysis

Lowest CPI Inflation Since 2012 at 6.46% in Oct 2014; RBI Very Likely to Cut Rates

Consumer Price Inflation for Sep 2014 came in at a low 6.46%, on the back of:

  • lower crude prices and,
  • a high base last year

This chart, though, explains it all. It’s actually coming down no matter which way you look at it. This is the lowest CPI inflation recorded since 2012 (since the new CPI Index came about).

And the best thing: even month on month, the index is flat, meaning: low inflation is not just because of the base effect, it’s even down month on month.

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And it’s everybody’s party, with both rural and urban inflation below 7%:

image

Food prices are softening, it seems, and indeed, everything’s falling. Food is the heaviest weight in the index. Housing, too, has receded to 8.1%, and Fuel too has fallen to just +3.5%.

image

This is solid data for a fall in interest rates. RBI will probably wait for one more data point (mid-November) before it decides to cut rates. We should however expect that RBI can cut rates mid-way and not wait for a policy date (which is in early December), if the situation gets really bad (low growth + increase in NPAs). While this is bullish news, the fact that there is a global slowdown might weigh on us in the shorter term. I wonder if the RBI will take a call immediately, or choose to wait for one more month?

  • This is great news. As the monsoon shortfall is covered to major extent, food prices cooled down. Fuel & Transport segment will see see 1-2% inflation numbers when the benefit of low crude is passed on to consumers by lowering Diesel prices in the coming months. Housing inflation may not see immediate relief instead would come down when the interest rates come down. Other segments like clothing, medical care etc. may not soften much from these levels as wages may not soften.
    But Rajan would wait for confirmation (for sure) and he is more likely to cut rates during early of 2015. When that happens, Bank Nifty will gather momentum as NPA will come down and the credit growth picks up. FMCG stocks would shed some fat.
    All of this inflation was manufactured at RBI by expanding their balance sheet as you had said in another article of yours. But now the recovery is in place, and the situation is more likely to get better.
    (I am seeing indicators of what is happening from past few months: http://booksmarketsandplaces.blogspot.in/2014/06/opinion-are-interest-rates-set-to-fall.html)

  • Leo says:

    well crude oil …what is the reason check again …none..2007 crude tanked from 75 to 50 dollors everyone told crude oil cheaper mkts rallied but from 50 to 150 it went non stop in one year …considering this logic without mkts falling crude is falling thereis a massive rebound coming in crude…which means from 81 odd it will hit 100 in the next 2 mintsh by december may be ….dont assume RBI will cut rates…

  • Mayank says:

    RBI will be happy with this inflation print, things are slowing faster than RBI anticipated but to cut rates I think RBI will wait for a while longer before they cut rates. Rajan believes that it is useless to cut rates only having to raise it once again, so he wants to be completely sure that inflation is broken down and trajectory is 6% or below by Jan 2016. Just 1st October RBI thought that inflation will be higher than 6% by Jan 2016, so I’m sure a few more months of data will be watched by RBI before cutting rates. If things go well, maybe a rate cut by Feb or April is likely?