Published on 14/02/2017 5:43:18 PM | Source: Religare Capital Markets Ltd

January’17 CPI inflation at record lows - But core inflation at an 11-month high - RCML

CPI inflation slid to a record low of 3.2% in Jan’17 (consensus: 3.9%), falling for the sixth month in a row. As in each of the last five months, the decline was led by easing food inflation (0.5%) even as core inflation inched up slightly. With stickiness in core inflation, upside risks to inflation (from 7th CPC HRA hikes, higher oil prices and INR depreciation) and a change in RBI’s monetary policy stance to “neutral”, we believe the rate cut cycle is over.


* Jan’17 CPI eases to a record low…:

Retail inflation, as measured by the Consumer Price Index (CPI), dropped to a record low of 3.2% YoY in Jan’17 (consensus: 3.2%) from 3.4% in the preceding month. This was the sixth consecutive month of decline; inflation has consistently eased from a 23-month high of 6.1% in Jul’16 to 3.2% in Jan’17.


* …as food inflation tanks…:

Food inflation dropped to a record low of 0.5% in Jan’17 from 1.4% in Dec’16, driving the decline in the headline inflation number. Food inflation has declined by nearly 8 percentage points since July, dragging the headline number lower, even as core inflation has remained stable. On a MoM basis, food inflation slid 1% in Jan’17 versus an average decline of 0.7% over the last five years.

The decline in food inflation was led by pulses, which saw inflation drop to -6.6% YoY in Jan’17 from -1.6% in Dec’16. Expectations of a record pulses output in the Kharif season (+57% as per 1st Advanced Estimates) has led to a sharp drop in pulses inflation over the last six months from over 25% in Jul’16. Vegetables inflation came in at a two-year low of -15.6% YoY in Jan’17 (Dec’16: -14.6%). The decline in pulses and vegetables inflation helped pull down the food inflation number by 50bps. Inflation in milk, eggs, fish & meat, spices, nonalcoholic beverages and prepared meals also inched lower in Jan’17.


* …and core inflation inches up:

Core inflation (excl. food and fuel & power) touched an 11-month high of 5.2% in Jan’17 (Dec’16: 4.9%). However, it remained within the 4.6-5.4% range for the 26th straight month. The rise in core inflation was driven by higher inflation in the transport & communication group on account of higher petrol and diesel prices.

Excluding the transport & communication group, core inflation remained steady at 5.1% in Jan’17 (Dec’16: 5.1%). In fact, inflation as per this measure has fallen by ~40-50bps over the last 9-10 months, even as it remains elevated. We believe a moderation in core inflation is imperative for the headline number to average at 4% on a sustained basis over the long term.


* Rate cut cycle over:

The issue of stickiness in food inflation has been emphasised in the last two monetary policy meetings and is a constraint to further monetary easing. Besides, significant upside risks to the RBI’s inflation trajectory (4-4.5%/4.5-5% in H1/H2FY18) exist. These include: (1) implementation of the housing allowances portion of the 7th CPC (expected to add 100-150bps to the headline number), (2) an increase in oil prices and (3) financial and currency market response to US fiscal and monetary policies and the subsequent impact on imported inflation via currency depreciation. The sharp fall in global-domestic yield differentials since Nov’16 will also constrain further easing.

We maintain that India’s rate cut cycle is over given (1) the considerable level of uncertainty surrounding the above variables, (2) the focus on bringing down inflation to its medium-term target of 4% on a sustainable basis and (3) the change in RBI’s monetary policy stance to “neutral” from “accommodative” in the last monetary policy meeting.


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