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Published on 13/03/2018 5:19:40 PM | Source: Motilal Oswal Securities Ltd

Retail inflation eases to a four-month low in February 2018 - Motilal Oswal

Posted in Special Event Reports| #Economy #IIP #Special Report #Inflation #Motilal Oswal #CPI

Retail inflation eases to a four-month low in February 2018

Favourable base continues to aid growth in IIP in January

* CPI inflation fell to a four-month low of 4.4% in February 2018 from 5.1% in the previous month. The number exceeded our and consensus estimate of +4.7%.

* Inflation in vegetables dropped sharply to 17% YoY in February, contributing as much as 50bp to the MoM decline in the headline number. While food inflation fell sharply to 3.2%, core CPI eased slightly to 4.9%.

* IIP surged by 7.5% in January 2018, higher than our/consensus expectation of +5%/6.4%, as output of consumer goods and capital goods rose sharply aided by a favourable base.

* Lower-than-expected inflation over the past few months makes us believe that inflation may not exceed 6% in June 2018, but come closer to ~5.8%. Thereafter, a high base is likely to pull down inflation to ~4% in 2HFY19. We expect the Reserve Bank of India (RBI) to look through such statistical effects and maintain status quo through 2018. I. Retail inflation eases in February 2018

* CPI inflation eases to 4.4% in February…:

* CPI-based retail inflation eased to a four-month low of 4.4% YoY in February 2018 from 5.1% in January 2018 (Exhibit 1). The number was better than our and consensus estimate of 4.7%. Inflation rose continuously from a record low of 1.5% in June 2017 to a 17- month high of 5.2% in December 2017, before easing in January/February 2018.

*…on account of a drop in vegetable inflation: The decline in headline inflation was largely on account of a sharp drop in vegetables inflation (weight in CPI: 6.04%), which fell to 17.6% YoY in February 2018 from 27% in the preceding month. This alone contributed as much as 52bp to the MoM fall in the headline number (Exhibit 2). Inflation in cereals, oils & fats, fruits, sugar & confectionary, milk, eggs and meat & fish also eased slightly in February. As a result, food inflation fell to a four-month low of 3.2% from 4.7% in January 2018.

* Core inflation eases marginally…: Core inflation (all items excluding ‘food & beverages’ and ‘fuel & light’) eased slightly to 4.9% in February 2018 from 5% in the preceding month (Exhibit 3). Core-core inflation (excluding petrol/diesel from core inflation) also inched down to 5.2% from a 23-month high of 5.3% in January. Inflation in the fuel & light group also edged lower, touching 6.8% in February 2018 from 7.7% in the previous month.

* …while inflation in ‘core services’ picks up: Further refinement of CPI items shows that inflation in ‘core services’ rose to a 10-month high of 4% in February 2018 from 3.8% in the preceding month (Exhibit 4), but was much lower than FY17/FY18 average of 4.7%/5.5%. Inflation in housing remained elevated at 8.3%, while that in goods eased sharply to 3.9% in February 2018 from 4.8% in the preceding month.

* Lower-than-expected inflation over the past few months makes us believe that, although inflation is set to rise over the next four months, it may not exceed 6% in June 2018, but come closer to ~5.8%. Thereafter, a high base should pull down CPI inflation closer to ~4% in 2HFY19. We believe that the RBI is likely to look through such statistical effects and maintain status quo in 2018.


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