Expect India's CPI readings to swing significantly near-term

Inflation could have a volatile trend, meanwhile.

Even though India's CPI at 7.8% is close to the early-2015 target at 8.0%, CPI readings are likely to swing significantly over the next six months due to base effects.

According to a research note from DBS, meanwhile, inflation could tick down towards 7.0% by November before bouncing back towards 8.0% in 1Q15.

In the midst of this volatile trend, the central bank will be wary of over-reacting to single data points.

Here’s more from DBS:

In the meantime, subsidy rationalization plans are yet to be outlined to affirm fiscal consolidation plans.

If the optimistic revenue projections and growth turnaround do not materialize, the deficit situation is likely to turn worrisome later in the year and necessitate reduction in capital expenditure to meet targets.

The central bank is likely to monitor these developments closely. That said, modest relief to the fiscal situation is likely from subdued global energy prices and lower food subsidies (due to lack of preparedness to unveil the food security program).

Rate cuts are hence not imminent and we expect the benchmark rate to plateau at 8% till end-FY15.

The Reserve Bank of India (RBI) will decide on rates today and consensus expects the Repo rate to be left unchanged at 8.0%.

The tone of the accompanying statement is likely to be balanced, acknowledging the recent moderation in headline and core CPI, alongside positive macro data outruns.

Though, it will not be sufficient to push the central bank to lower rates as yet.

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