India Insight:CPI inflation falls sharply,scope for further easing remains

Headline CPI inflation decelerates to 4.3% YoY in September, lowest in ayear: This compares with 5% YoY registered in the previous month. This wasbelow our expectation of 4.5% and the market expectation of 4.6%. Coreinflation picked up marginally, to 4.7% YoY (vs 4.6% YoY in August).

CPI inflation trajectory – down and up: We expect a U-shaped trajectory forheadline CPI inflation for the rest of FY17. We believe further easing of foodinflation (especially pulses) and a favourable base effect will help lower CPIinflation to ~4% over the next two months before normalising towards anaverage of 4.7% YoY in the March 2017 quarter (lower than the RBI’s targetof 5%). The good progress in the sowing of summer crop (food grainproduction for summer crop is up 9% YoY, as per first advance estimateslink), a deferred hike in allowances under the 7th Pay Commission, sluggishglobal crude oil prices and a gradual domestic demand recovery will likelykeep inflationary pressures contained for the rest of FY17, in our view.

Policy implication: We believe the stance of monetary policy remainsaccommodative and see scope for a further 25bp cut in the repo rate for therest of FY17. However, the timing of monetary easing will be largely datadependentand determined by (a) domestic factors, including the house rentallowance (HRA) increase under the Pay Commission award (report expectedover the next couple of months), closing of the output gap and supply-sidebottlenecks, and (b) global factors, including the US presidential electionoutcome, a possible Fed move in December and a movement in globalcommodity prices.