Inflation continues to inch up.
CPI inflation continued to move up from its trough and is set to hit the 4% mark in November. Vegetable prices continued increasing sequentially in line with the seasonal effect. Core inflation inched up on the back of housing (7CPC HRA effect). We expect the upward trend to continue over the next few months along with some sequential seasonal softening of food prices in 3QFY18. We maintain our call that the RBI would pause for the rest of FY2018.
August CPI inflation accelerates as vegetable prices continue to play spoilsport
CPI inflation accelerated further to 3.4% in August from 2.4% in July, led largely by surge in food inflation. Food inflation was at 2% compared to 0.4% in July. On a sequential basis, the food index moved up 1.2% mom primarily led by vegetables (5.9%) and fruits (2.5%). Price of pulses continued to contract sequentially. The high frequency data from the wholesale markets are indicating some moderation in prices of fruits and vegetables in September while prices of cereals and pulses remain contained. Fuel and light inflation came in at 4.9% (4.9% in July). We estimate September headline inflation at around 3.6%.
Core CPI inflation inches higher on the back of housing segment (7CPC HRA impact)
Core inflation picked up to 4.5% in August (from 3.9% in July). Monthly momentum also inched higher at 0.9%, compared to 0.6% in June. The sequential uptick in housing segment (1.4% in August after increasing 1% in July) corroborated with our estimated uptick due to 7CPC HRA being factored in. Over the next six months, we expect core inflation in a range of 4.2-4.9%, as the full impact of the center’s HRA component flows through even as demand-side pressures remain muted. Excluding HRA, core inflation is expected to range 3.8-4.2% (Exhibit 1).
IIP growth yet to pick up
July IIP printed a growth of 1.2% compared to (-)0.2% in June. Sector-wise, manufacturing growth was at 0.1% in July indicating extremely tepid production normalization after pre-GST jitters seen in June. Sequentially manufacturing production contracted 0.8% mom. Most of the uptick in manufacturing growth was helped by pharma products (18.9%), and other transport equipment such as two-wheelers (10.5%) and basic metals (3.6%) while contraction of 43.5% in tobacco products, 11.1% in electrical equipment and 6.2% in chemical and chemical products were drag on manufacturing sector’s growth. Electricity grew 6.5% while mining grew 4.8%. On use-based basis, capital goods continued to contract with August at (-)1%. Consumer non-durables grew 3.4%, while consumer durables contracted 1.3%. Infrastructure and construction sector grew at 3.7%.
Inflation trend supports RBI staying put for rest of FY2018
We expect headline CPI inflation to inch higher henceforth as adverse base effect, mean reversion of food prices and 7CPC HRA impact begins to seep in, pushing the headline inflation towards 4.7% by March 2018 (4.3% without HRA). Nonetheless, core inflation is expected to remain tepid, averaging 4.4% in FY2018 compared to 4.7% in FY2017 underscoring the weak underlying demand pressures. We reiterate our call that the RBI will pause for the rest of FY2018. We remain watchful of the incoming data and reckon that room for any further cut can open up again if inflation surprises below the 4% mark on the back of (1) improvement in food supplies amid good monsoon, (2) imported disinflation due to INR appreciation and (3) downward surprise of core inflation owing to weaker-than-expected growth.
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