印度共和国 Economics:Steady inflation creating room for

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Steady inflation with deceleration in food prices…: September CPIinflation remained steady at 3.28%YoY (same as August), against anexpectation of an acceleration (Bloomberg consensus at 3.5%). The surprisewas led by a lower-than-expected rise in food prices and also a muted rise incore inflation compared to the last 2-month trend. We see the inflation data asmarking the near-term peak in the current uptrend. Indeed, high frequencyfood prices for October indicate a moderation, which coupled with the recentreduction in fuel prices (led by a reduction in tax rates) should lead to a lowerinflation print for October (our estimate at approx.. 2.8-3%).

The US Treasury released much-awaited list of Russian individuals linked to Putin, markets heave sigh of relief as sanctions not extended. The full list is available publicly and includes a number of senior political figures close to Putin and few oligarchs with a net worth of USD 1bn or more. However, the US administration has already said that these individuals will not face additional sanctions, as being on the list should itself serve as a deterrent, sparking a major relief rally in Russian assets. The RUB strengthened to around 55.9 overnight. The report on impact of extending sanctions to sovereign debt and financial derivatives is expected on 2 Feb.

    … increases probability of a rate cut in Dec policy review, in line withour expectation: We believe that the balance of risk tilts in favour of a 25bprate cut in the Dec policy review given that inflation will likely hover at a lowerlevel in 2HFY18 closer to 3-3.75% compared to RBI’s expectations of 4.2-4.6%. As we have highlighted before, keeping real rates at the upper end ofthe 1.25-2% band amidst a weak growth outlook may not be warranted. Wedo not envisage any meaningful price pressures emerging, given the benigntrend in the drivers of inflation – excess capacity in the system, benign globalcommodity prices, proactive food supply management and prudent fiscalmanagement. Indeed, while we are building in another rate cut in FY18,consensus expectations are for a status quo, and in this context expectationsof a further easing could keep equity markets supported in the near term.

    We expect the ruble to continue to strengthen this year on strong growth and still high real rates. Correlation of the ruble with oil prices has already declined significantly in 2017. Only the limited impact of oil is expected this year as well, especially with the implementation of the MinFin’s new budget rule.

    High-frequency indicators suggest further slowdown in Q4. As per data up to December, 4 out of 5 main sectors of the economy have posted slowdown in Q4, when compared to Q3. Industrial production has posted the largest slowdown with growth declining from +1.2% YoY on average in Q3, to -1.7% YoY in Q4. Growth in the retail trade, on the other hand, has posted an improvement, as household demand is fuelled by rising wage and income growth, higher growth in credit to households and stronger consumer confidence. Retail sales growth has improved from 2.1% YoY on average in Q3 to 3.0% YoY in Q4. On the other hand, decline in the household savings rate has stalled as a faster fall in inflation has caused real rates to increase. We now expect real GDP growth to slow further in Q4 and thereby take full-year growth to 1.7%. Growth is likely to improve after the Presidential elections in March and reach 1.9% for 2018.

    Headline inflation ended 2017 at historic low of 2.5%; below the 4% target. Annual average inflation thereby reached 3.7%, 3.4pps lower than in 2016. The declining trend in food prices seems to have reached a trough, with inflation in this sector rising in December for the first time since the harvest-related spike in July. The increase in food prices were led mainly by the 3.7pp jump in inflation in fruits and vegetables prices. Core inflation, however, continued to decline with both the ROSSTAT and CBR measures reaching historic lows of 2.1% YoY and 2.3% YoY respectively.

    Markets have been concerned about the lack of proper guidance on interest rate path. CBR surprised markets just before the year-end, easing by 50bps (DB and market consensus for 25bps easing) and took its key policy rate to 7.75%. The December meeting made it clear that the CBR was likely to be more data-driven going forward, despite its strong hawkish comments. We thus maintain our call for further easing, in 25bps installments, likely skewed to H1-2018, as inflation continues to decline. We expect a pause in rate cuts in Q4-2018, as inflation begins to converge towards the target from below.

    The current account posts large surplus in Q4. The CAB jumped from - USD2.5bn in Q3 to USD17.8bn in Q4. Current account is typically stronger in Q4. The improvement in Q4-17 was led mainly by higher goods exports, both oil and non-oil, and lower services imports. The surplus in the current account was matched by a large net outflow in the financial account, led by the banking sector. However, reserve accumulation should continue, despite the outflow.

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