Published on 13/09/2017 3:32:17 PM | Source: Motilal Oswal Securities Ltd

Vegetables drive CPI inflation higher in August - Motilal Oswal

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Vegetables drive CPI inflation higher in August

Case for a rate cut remains, with a likely cut in GDP growth forecasts

* As against our expectation of 3% and market consensus of 3.2%, CPI-based inflation stood at 3.4% YoY in August 2017, primarily driven by higher vegetable prices. Excluding vegetables, inflation was subdued at 3.1%, only slightly higher than the six-year low of 2.9% in the previous two months.

* IIP, on the other hand, grew 1.2% in July, lower than our expectation of +2% and market consensus of +1.6%. Output of consumer durables and capital goods remained weak.

* Overall, we expect inflation to be ~4.5% in March 2018 and average 3.5% for FY18. Furthermore, the market has converged with our view that 7% GDP growth is unlikely. The RBI too is expected to cut its GDP growth forecasts.

* Whether or not the RBI cuts rates will depend on if the focus shifts from inflation to GDP growth. We believe that inflation is likely to remain under 5% for FY19, but growth may come under pressure. Thus, there is sufficient room for another rate cut, in our view.

 

Retail inflation at five-month high of 3.4% in August

* CPI inflation at five-month high…: CPI-based inflation rose to a five-month-high of 3.4% YoY in August 2017 from 2.4% in the preceding month (Exhibit 1). This is higher than our expectation of 3% and market consensus of 3.2%. It was also the first instance of a higher-than-expected rise in the headline number in five months; inflation had consistently missed expectations in each of the last four months.

*  …largely on account of higher vegetable prices: Vegetable prices rose 6.2% YoY in August 2017 (after declining by 3.6% in the preceding month), contributing ~60bp to the rise in the headline inflation number. Excluding vegetables, inflation was subdued at 3.1%, only slightly higher than the six-year low of 2.9% in the previous two months.

 

* Core inflation surges to 4.5% in August 2017: Core inflation (all items excluding ‘food & beverages’ and ‘fuel & light’) rose to a five-month high of 4.5% in August 2017 from 3.9% in July (Exhibit 3). Inflation in housing surged to 5.6% from 4.9% in the preceding month (Exhibit 4), as the government implemented House Rent Allowance (HRA) hikes in August. Inflation in fuels (petrol, diesel and lubricants) rose to 10% from 2.4% in July, pushing up core inflation. Core-core inflation (excluding petrol/diesel from core inflation) exhibited a relatively mild increase to 4.4% from 4.1% in July 2017.

* Overall, we expect inflation to stand at ~4.5% in March 2018 and average 3.5% for FY18. Further, the market has converged with our view that 7% GDP growth is unlikely. The RBI too is expected to cut its GDP growth forecasts. Whether or not the RBI cuts rates depends on if the focus shifts from inflation to GDP growth. We believe inflation is likely to remain under 5% for FY19, but growth may come under pressure. Thus, we believe that there is sufficient room for another rate cut.

 

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