India’s April inflation surprises on the upside, RBI unlikely to lower rates in June

India’s inflation accelerated more than consensus expectations in April. The consumer price index inflation was registered at 5.4% y/y, as compared with the consensus expectations of 5.1%. Inflation in March had slowed down to below the Reserve Bank of India’s target rate of 5%. March’s decline was anticipated to be for a temporary period of time; however, the recovery in last month was slightly stronger than projected.

Firmer acceleration of inflation was mainly because of food prices, which increased more than expected. Food CPI was up 1.4% m/m in April. Meanwhile, retail fuel prices rose markedly in April, indicating the increase in Brent crude to USD 45/bbl; however, the contribution of fuels to the headline inflation continues to be small due to low weight in the headline CPI. Core CPI, stripping diesel, petrol and fuel and light category, continued to be stable at 5% y/y.

Meanwhile, the industrial output growth slowed markedly as compared to consensus projections. Auto sales continue to seem strong, but the recent decline in the overall manufacturing PMI implied that the industrial sector will continue to face headwinds. Meanwhile, the services sector is growing strongly.

Even though the market continues to argue about the odds of the RBI lowering rates in June, it is unlikely that the central bank will cut rates, said ANZ in a research report. The central bank will require additional information regarding if monsoon will provide lucidity regarding food inflation outlook. If monsoon turns out to be good, the RBI might lower rates further, but it is expected to pause the rate cutting cycle through 2016 for now.