India: Solid growth with higher core – Nomura

Analysts at Nomura point out that India’s CPI inflation eased marginally to 4.3% y-o-y in March from 4.4% in February, higher than expected.

Key Quotes

“The headline moderation was due to lower food price inflation, but core inflation (CPI ex- food, fuel) made a strong comeback – picking up to 5.3% y-o-y from 5.1% in February. Sequential core momentum rose sharply, reversing the downtrend of the last two months; as have underlying inflation measures, which have risen to ~4.5% y-o-y from ~4.2% in February.”

“Industrial production (IP) growth moderated to a still-strong 7.1% y-o-y in February from 7.5% in January. Capital and infrastructure sectors performed strongly, as did consumer durables, but consumer non-durables output growth disappointed.”

“Does this change your economic view? No. We see the March data as an extension of a growth-inflation sweet-spot, although this faces a few emerging threats. In particular, the sharp increase in core momentum suggests that underlying pressures are likely to persist in Q2 and add to emerging inflationary risks (oil, higher minimum support prices). On growth, while lead indicators still point to a cyclical recovery, a weak banking sector and global trade tensions are a downside risk. We expect policy rates to be on hold through 2018, but rising oil and higher MSPs still suggest a risk of hawkish rhetoric in the coming months.”

“Rates strategy implications: Despite some moderation in headline inflation relative to the previous month’s reading, today’s print is marginally negative as it came in higher than expected. That said, given the recent correction in bond prices which, in our view, reflects higher-than-expected state development loan (SDL) supply and wariness on crude prices, we expect range-bound markets in the near term. We expect 10yr bonds to trade in a 7.35-7.55% range in the near term.”