July inflation eased to a five-year low of 3.5% yoy, from 5.1% yoy in June, on favourable base effects. Food, which had been responsible for much of the stickiness in inflation in recent months, rose by a slower 5.4% yoy vs 9.4% month before. By contrast, core inflation quickened to 3.4% yoy, converging with the headline. The latter reflected the pass through of telecom tariff hikes (added 0.15ppt to the headline) and uptick in personal care & effects. The headline inflation’s softer start in July suggests that the RBI’s current quarter’s inflation forecast of 4.4% will be undershot. The outlook for food inflation is turning favourable as monsoon tracks 6% above normal alongside healthy kharif crop sowing and benign global prices. On policy, the RBI had already signalled that Jul-Aug inflation outruns will be looked through because of the base effects, with the outlook thereafter to be given more weightage. As base effects fade, inflation is poised to head back above 4% by Sep. On the global front, markets are focused on the US inflation numbers due mid-week.
Back home, doves had little to feed on at the August policy meeting. The RBI monetary policy committee (MPC) kept the repo rate on hold at 6.5%, with hawkish undertones. The commentary reinforced that India’s growth-inflation mix backed a pause, in contrast to global pricing for a dovish pivot. The Governor pushed back on calls for non-food or core inflation to be given a bigger weightage in the price targets (see India RBI monetary policy: Hawkish undertones). While the rate review was uneventful for bonds, absence of fresh sterilisation steps to drain liquidity was a modest positive. Separately, the country’s largest insurer is reportedly planning to enter bond forward rate agreements (FRA) or bond forwards this year, according to the local press. 10Y benchmark yield is expected to hover with 6.85-6.90% this week. With the rupee struggling to gain ground despite the US$ pullback, authorities have been active dollar sellers to prevent USDINR’s break above 84.00 to a new rupee low.
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