After bottoming in June at 1.5%, India's CPI inflation inched up to 3.4%yoy inAugust (from 2.4% in July), which was in line with our expectation, but beingslightly higher than the Bloomberg consensus estimate (3.2%). On a seasonallyadjusted basis, this constituted a 0.7%mom increase in August (vs. +0.8%momin July), which pushed up the inflation momentum (measured as the 3m/3mseasonally adjusted annualized rate) to 2.1%, from 0.3% in July.    A further increase in food prices (+2.0%yoy; +1.2%mom in August vs. 0.4%yoy;2.8%mom in July, led by fruits (5.3%yoy vs. 2.9%yoy) and vegetables (6.2%yoyvs. -3.6%yoy) and higher housing inflation pushed up the yoy August CPI rateby 100bps from the July level. CPI excluding food and fuel moved up to 4.5% inAugust, from 3.9% in July while CPI excluding food, fuel and transport (proxy forcore inflation) touched 4.7%yoy (vs. 4.4% in July). Housing inflation rate, whichincorporates the partial staggered impact of the increase in HRA allowances,increased to 5.6%yoy in August (+1.4%mom) from 4.9%yoy in July, more thanwhat we had expected. Clothing and footwear inflation also rose at a faster paceof 4.6%yoy in August from 4.2% in July. Services inflation accelerated to 3.8%yoyin August from 3.3% in July mainly led by transport and communication (3.7%vs. 1.8%).    The July industrial production data was also released yesterday. IP grew 1.2%yoyin July (vs. -0.2%yoy in June), lower than the Bloomberg consensus estimate(1.6%). This constituted a 0.4%mom decline in July IP (-1.6%mom in June) ona seasonally adjusted basis. The slight improvement in the July yoy IP rate wasled by all the key sectors including mining (4.8% vs. 0.4%) , electricity (6.5%vs. 2.1%) and manufacturing (0.1% vs. -0.5%). Among use-based classification,capital goods production continued to disappoint, albeit at a slower pace (-1.0%in July vs. -6.6% in June). Consumer durables production also contracted (-1.3%vs. -2.4%), while non-durables consumer goods production rose at a slower paceof 3.4% vs. 4.7%.    Growth has surprised sharply to the downside in April-June, but inflation hasstarted picking up and will likely inch up further in the coming months, led by anunfavorable base effect. In our assessment, RBI will revise down its FY18 growthestimate in the October monetary policy, but will not cut rates immediately inreaction to the lower than anticipated April-June GDP outturn or the weaknessin recent IP data. The central bank, in our view, will wait for the July-Sep GDPdata (to be released on 30th Nov) to assess how much of the recent growthslowdown was led by one-off factors such as the GST and decide on the courseof monetary policy action based on the growth-inflation mix at that juncture as well as the forward trajectory. If July-Sep growth also surprises materially to thedownside, and inflation trajectory looks to be in line to achieve the 4% CPI targetby March’18, then there could be consideration for further rate cuts (either inDec’17 or Feb’18 policy), but this is not our base case scenario. We expect growthto rebound in July-Sep’17 and CPI inflation to touch 4% in the 4Q of 2017, whichunder a forward looking inflation targeting framework will make it difficult forRBI to cut rates further, in our view.    Revision: This note corrects a technical error related to email distribution.

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