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Charts & Analysis

What a Surprise: Inflation in July 2015 at a Delightfully Low 3.78%


Inflation for July 2015 has come in at a new all time low of just 3.78%.


Some of this is indeed expected, as last year the index went sharply up, till September 2014, before the crude fall came and killed all elements of inflation in India.

Both Urban and Rural Inflation are down substantially:



Apparently, food inflation has fallen tremendously:


Core Inflation – the move of the index minus food and fuel – has fallen too.


Our View:

We believe that:

  • Inflation is expected to be lower as last year at this time, crude were quite high. The effect will wear off in September. We’re only in July so August data too will be kind.
  • The monsoon isn’t too bad and we are seeing enough agriculture enthusiasm, so food prices might remain low (or not increase much).
  • Housing prices too have fallen, and we might see that curtail inflation expectations going forward.
  • Is this enough for RBI to cut rates? Well, inflation’s off the table for two more months, but banks have to cut rates.
  • Banks have shown profits – and a reasonably good amount of profits – so they are not really constrained in terms of rates. Unless they cut rates, RBI will not. RBI has already done 75 bps. (That’s my opinion)
  • With the USDINR falling to Rs. 64.77 today, the highest rate in a year, inflation may come from the currency (we are a net importer – a 10% drop in prices can be offset by 10% higher import costs due to currency). 
  • The US Fed will decide on hiking rates in September. Our rate changes may have to wait till then.

Note that the China devaluation of the Yuan does change a few things. The RBI is looking more comfortable with the 64 handle on the USDINR and we are seeing our competitive neighbours (Indonesia, specially) see much higher devaluation. The impact of a weaker rupee is: inflation. And that, plus the US Fed Rate issue, may just mean your friendly neighbourhood rate hike may neither be friendly or in the neighbourhood.


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