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Published on 13/12/2019 12:08:54 PM | Source: Motilal Oswal Services Ltd

CPI inflation exceeds expectation; IIP continues declining - Motilal Oswal

Posted in Economy News| #Economy #IIP #Motilal Oswal #CPI

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CPI inflation exceeds expectation; IIP continues declining

Rate cut in next policy meeting unlikely

* CPI-based retail inflation shot up to a 40-month high of 5.5% in Nov’19 from 4.6% a month ago. The number was in line with both our estimate and consensus of 5.3%.

* Food inflation accelerated to almost six-year high at 10% in Nov’19 (our estimate: 9%) from 7.8% in the previous month, driven by ‘cereals and products, ‘pulses and products’, ‘milk and products’, ‘oil and fats,’ and ‘vegetables.’ Note that vegetable inflation too inched up to almost six-year high of 36% in Nov’19 v/s 26.1% a month ago.

* Among the non-food category, while ‘fuel and light’ continued exhibiting deflationary trends, inflation in ‘pan, tobacco and intoxicants’, ‘housing’ and ‘clothing and footwear’ decelerated in Nov’19.

* As expected, core inflation (all items excluding ‘food & beverages’, ‘pan, tobacco & intoxicants’ and ‘fuel & light’) reversed trajectory and inched up to 3.7% YoY in Nov’19 from 3.3% a month ago, exactly in line with our expectation. Please note that we estimate core CPI using exclusion method (headline CPI ex food & beverages, pan, tobacco and intoxicants, and fuel and light). However, if one uses the addition method (housing, clothing & footwear and miscellaneous), core inflation has remained unchanged at 3.5%. This is totally surprising and unwarranted.

* Index of Industrial Production (IIP) declined for the third consecutive month by 3.8% in Oct’19. The decline was slower than our estimate of 4.7% and consensus of 5.0%. Notably, IIP growth for Jun’19 has been revised to 4.9% from 4.6% earlier. The decline in IIP in Oct’19 was contributed by all its major components. Within use-based categories, recordhigh growth in intermediate goods production offset the decline in capital goods production and infrastructure/construction activities.

* The spike in retail inflation and the decline in IIP suggest a continuation of the combination of higher inflation and lower growth. Although there have been minor improvements in economic activity in Nov’19, it is hard to predict if the recovery is strong enough to lead to more than 4.5% GDP growth in 3QFY20. Nevertheless, we expect the RBI to continue prioritizing higher inflation over lower growth, as evident from the Dec’19 monetary policy meeting.

 

I. Retail inflation higher than expectation

* CPI inflation inches up in Nov’19…: CPI-based retail inflation shot up to a 40- month high of 5.5% in Nov’19 from 4.6% a month ago (Exhibit 1). The number was in line with both our estimate and consensus of 5.3%.

* …primarily led by food inflation: Food inflation accelerated to almost six-year high at 10% in Nov'19 (our estimate: 9%) from 7.8% in the previous month (Exhibit 2), driven by 'cereals and products, 'pulses and products', 'milk and products', 'oil and fats,' and 'vegetables.' Note that vegetable inflation too inched up to almost six-year high of 36% in Nov'19 v/s 26.1% a month ago. Among the non-food category, while 'fuel and light' continued exhibiting deflationary trends, inflation in 'pan, tobacco and intoxicants', 'housing' and 'clothing and footwear' came down in Nov'19.

* Core inflation rose in Nov’19: As expected, core inflation (all items excluding ‘food & beverages’, ‘pan, tobacco & intoxicants’ and ‘fuel & light’) reversed trajectory and inched up to 3.7% YoY in Nov’19 from 3.3% a month ago, exactly in line with our expectation (Exhibit 3). Please note that we estimate core CPI using exclusion method (headline CPI ex food & beverages, pan, tobacco and intoxicants, and fuel and light). However, if one uses the addition method (housing, clothing & footwear and miscellaneous), core inflation has remained unchanged at 3.5%. This is totally surprising and unwarranted.

* Inflation in ‘core services’ eases further: Inflation in ‘core services’ decelerated to over two-year low of 3.5% in Nov’19 from 3.9% a month ago (Exhibit 4), supported by lower inflation in all its sub-components, except health & personal care.

* Policy rate cut unlikely in Feb’20: The spike in retail inflation and the decline in IIP suggest a continuation of the combination of higher inflation and lower growth. Although there have been minor improvements in economic activity in Nov’19, it is hard to predict if the recovery is strong enough to lead to more than 4.5% GDP growth in 3QFY20. Nevertheless, we expect the RBI to continue prioritizing higher inflation over lower growth, as evident from the Dec’19 monetary policy meeting.

 

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