Brief: CPI inflation in April 2017 hits a new low of 3%; SMERA is more concerned with the expansion of Core inflation because the build-up can be relentless and therefore be a cause of worry in the near term; Over the last two years, core inflation, which is hovering at 5% has recorded a standard deviation of only 0.18

Impact: Neutral

India’s CPI inflation has hit a new low of 3% in the first month of FY18. This inflation rate is lowest over the last five years (base year of 2011-12 onwards). SMERA, however, believes that the lower inflation rate does not warrant any reaction from the RBI as further easing of the monetary policy may lead to inflationary pressures. This is because at 4.6%, core inflation remains healthy in April. Non-core inflation that include food and fuel, accounting for 46% in overall inflation, has however dropped to 1.4% during the said period. Clearly, the lower overall inflation rate is attributed to non-core category, which is nullifying the performance of core category. It must be understood that non-core category is largely driven by international commodity prices and this is helping the Indian cause but core inflation on their part are indicating a strong growth. This situation showcases a growing trend in domestic demand, which in turn is driving up prices but in the case of imported commodities such as fuels, that is not the case. Prices of food items are benefited by a good buffer stock due to record production in FY17 and also overall global food prices remaining stable.

SMERA is more concerned with the expansion of Core inflation because the build-up can be relentless and therefore be a cause of worry in the near term. Over the last two years, core inflation, which is hovering at 5% has recorded a standard deviation of only 0.18 and what this signifies is the fact that there may not be any surprise falls. At 1.9, standard deviation of non-core category on the other hand is much more uncertain due to higher international volatility.

Due to poor monsoon, the food inflation was out of control in FY15, FY16 and early FY17, however, with the healthy monsoon in FY17, the food grain production recorded solid growth of 8.7%. Moreover, in addition to healthy monsoon the government has also improved supply chain management. Cold storage capacity as an example, has increased from 29 million tons in FY13 to 47 million tons in FY17. Raising food capacity has reduced the food wastage and helped in curbing inflation to some extent. Similarly, regulating tariff rate (to control export and import of food products according to the domestic requirements) in order to keep the price levels under control has helped greatly. The food inflation that contributes 39% in overall inflation had accelerated to 8.3% in July, 16; these prices are now stowing a growth of just 0.6% in April.

Therefore, SMERA anticipates deflation in food price in near future and therefore overall inflation may fall to another new low. A favorable base effect spread over the following three months will also benefit in lowing the trend. However, we do not anticipate a Repo cut in the near term as Core is consistently moving upwards; also any further cuts may have adverse impact on currently under pressure bond spreads.