India: Change in RBI rate call as core inflation accelerates – Nomura

Analysts at Nomura note that India’s CPI inflation rose to 4.6% y-o-y in April, from 4.3% in March, higher than expected (Consensus: 4.42%; Nomura: 4.3%) and the big surprise in the April inflation print was the sharp rise in core inflation.

Key Quotes

“Core inflation (CPI ex-food & beverages, fuel) rose to 6.1% y-o-y in April, from 5.3% in March, above our forecast of 5.8%. Of this, we estimate that adverse base effects contributed ~0.4pp, while higher petrol/diesel prices added ~0.25pp.”

“With higher core inflation momentum and rising oil prices, we now expect a cumulative 50bp rate hike in 2018, versus our previous forecast of a prolonged pause. We note four upside risks to inflation: cobweb (food) cycle, higher minimum support prices, rising crude oil prices and weaker USD/INR. Food (ex-vegetable) prices are benign so far, which should offset these upside risks and enable inflation to evolve in line with the RBI’s projections.”

“However, we are changing our RBI call for three reasons: 1) the acceleration in core inflation indicates demand-push inflation that can no longer be ignored; 2) emerging macro stability risks from higher oil prices and portfolio outflows (balance of payment funding stress); and 3) risk of unmooring of inflation expectations.”

“In our new base case (55% probability), we expect the monetary policy committee (MPC) to change its policy stance from “neutral” to ‘withdrawal of accommodation’ at the next meeting (6 June), followed by a 25bp repo rate hike at each of the following two meetings (1 August and 4 October). Alternatively (40% probability), the MPC could pre-emptively hike by 25bp in June, followed by another 25bp hike in August.”

“Higher-than-expected CPI suggests rate hikes are now likely at upcoming policy meetings (our economics’ team base case). As such, yields are likely to move higher (both in bonds and swaps) given higher-than-expected inflation numbers. We have a bias to add payers in front end along with flatteners as hikes are looking more likely. We are neutral on bonds.”