Kotak Institutional Equities expects the inflation to remain below 4 percent for the next eight months
Kotak Institutional Equities
Positive macro data points towards a rate cut in the near future. The November CPI inflation of 2.3 percent affirms that the MPC would now tread towards a softening stance in the upcoming meetings.
While we continue to expect a shift in stance to ‘neutral’ before the onset of rate cuts, we acknowledge that the recent downward surprise to inflation has increased the probability of a rate cut in the February meeting itself.
We now expect 50 bps of a rate cut in CY2019 (likely in H12CY019). CPI inflation eased to 2.33 percent in November (Consensus: 2.58 percent) compared to an upward revised print of 3.4 percent in October.
Even as the base effect was favourable for a lower print, the sharp contraction of 2.6 percent in food inflation, led by vegetables, pulses, eggs, and sugar triggered the decline.
Core inflation softens significantly
Core inflation moderated to 5.7 percent in November (6.2 percent in September) driven by softening inflation across housing, health, and personal care.
Excise cuts and the recent correction in oil prices have begun to weigh on transport and communication segment, moderating to 6.1 percent (7.7 percent in October). On a sequential basis, core inflation stayed flat after expanding 1 percent MoM in October.
Kotak Institutional Equities expects core inflation to average 5.6 percent between December 2018 and March 2019 compared to 6.1 percent in 8MFY19.
IIP growth strengthens to an 11-month high:
IIP growth strengthened to 8.1 percent in October (Kotak: 4.8 percent, Consensus: 6 percent) compared to 4.5 percent in September. The uptick was broad-based, caused by stronger growth of 7.9 percent in manufacturing (4.6 percent in October), 10.8 percent in electricity (8.2 percent in October) and 7 percent in mining and quarrying (0.1 percent in September).
Capital goods and infrastructure/construction posted strong gains of 16.8 percent and 8.7 percent, respectively. Growth in consumer goods also went up sharply, primarily aided by a favourable base in the consumer durables segment, which grew by 17.6 percent. We do not expect this trend in IIP to sustain as indicated by softening lead indicators.
RBI likely to change stance in February followed by 50 bps rate cuts
The continued downward surprise to the inflation trajectory has created the perfect condition for a softening bias by the MPC. The November inflation outturn has been around 40 bps lower than RBI’s recently downwardly revised H2FY19 range of 2.7-3.2 percent.
Kotak Institutional Equities expects the inflation to remain below 4 percent for the next eight months. With the next two readings also expected to be below 3 percent, we expect the MPC to change its stance to ‘neutral’ in February.
While the domestic brokerage firm expects a shift in stance before the onset of rate cuts, it acknowledges that the recent downward surprise to inflation has increased the probability of a rate cut in the February meeting itself.Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.