CPI inflation at 7% in August`22; IIP lower-than-expected in July`22 By Motilal Oswal Financial Services
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RBI may hike the repo rate by another 50-60bp by Dec’22
* CPI-based retail inflation came in at 7% YoY in Aug’22, higher than the 6.7% YoY in Jul’22. This number is marginally higher than a Bloomberg survey of 6.9% YoY, but is in line with our expectation.
* Food inflation came in at 7.6% YoY in Aug’22 as against 6.7% YoY in Jul’22 and 3.1% YoY in Aug’21. This was led by a 103- month high in ‘cereals and products’ (weightage: 9.7%) inflation, at 9.6% YoY, in Aug’22. Inflation in ‘oil and fats’, ‘eggs’, and ‘meat and fish’ came in lower in Aug’22. The other important observations in the 12th Sep’22 data release are: 1) Core inflation (housing, clothing, and footwear and miscellaneous) stood at 6.1% YoY – slightly higher than the 6% YoY in Jul’22; 2) While imported inflation (weightage: 10%) eased further to a 23-month low of 11.2% YoY in Aug’22, domestically generated inflation touched an 18-month high of 6.5% YoY in Aug’22 v/s 5.8% YoY in Jul’22; 3) Inflation in ‘services’ touched a 12-month high of 5.2% YoY in Aug’22 (similar to Aug’21 levels), while that in goods inched up to 7.5% YoY in Aug’22 from a five-month low of 7.1% YoY in Jul’22; and 4) Core CPI, as per global standards (CPI excluding food and energy), increased to a four-month high of 6.4% YoY in Aug’22 from 6.3% YoY in Jul’22.
* IIP growth stood at 2.4% YoY in Jul’22 as against 12.7% YoY in Jun’22 and 11.6% YoY in Jul’21. This number is lower than our forecast of 3.8% YoY as well as a Bloomberg survey of 4% YoY. Surprisingly, mining activity contracted by 3.3% YoY in Jul’22 – its first decline in 17 months. Both manufacturing activity and power generation decelerated in Jul’22. After a strong growth in May-Jun’22, there was a notable decline of 0.2% YoY in the production of consumer goods in Jul’22.
* With the actual IIP data for Jul’22, our in-house indicators for real GVA growth stands broadly unchanged at 7.2% YoY in Jul’22 (from 7.3% YoY estimated earlier). We continue to expect a 5-5.5% YoY growth in real GDP in 2QFY23.
* A combination of inline inflation and lower-than-expected IIP is not ideal, but it is unlikely to change anything for policy makers. We expect the RBI to hike policy rates by another 50-60bp in the remainder (four-months) of CY22, with a 25- 35bp hike at its Sep’22 monetary policy meeting. This would take the repo rate to 6% by Dec’22.
* CPI inflation in line…: CPI-based retail inflation came in at 7% YoY in Aug’22, higher than the 6.7% YoY in Jul’22. This number is marginally higher than a Bloomberg survey of 6.9% YoY, but is in line with our expectation.
* on account of higher food inflation: Food inflation came in at 7.6% YoY in Aug’22 as against 6.7% YoY in Jul’22 and 3.1% YoY in Aug’21. This was led by a 103-month high in ‘cereals and products’ (weightage: 9.7%) inflation, at 9.6% YoY, in Aug’22. Inflation in ‘oil and fats’, ‘eggs’, and ‘meat and fish’ came in lower in Aug’22. The other important observations in the 12th Sep’22 data release are: 1) Core inflation (housing, clothing, and footwear and miscellaneous) stood at 6.1% YoY – slightly higher than the 6% YoY in Jul’22; 2) While imported inflation (weightage: 10%) eased further to a 23-month low of 11.2% YoY in Aug’22 as against 13.3% YoY in Jul’22, domestically generated inflation touched an 18-month high of 6.5% YoY in Aug’22 v/s 5.8% YoY in Jul’22; and 3) Inflation in ‘services’ touched a 12-month high of 5.2% YoY in Aug’22 (similar to Aug’21 levels), while that in goods inched up to 7.5% YoY in Aug’22 from a five-month low of 7.1% YoY in Jul’22.
* CPI, excluding food and energy, rose to four-month high: Core CPI, as per global standards (CPI excluding food and energy), increased to a four-month high of 6.4% YoY in Aug’22 from 6.3% YoY in Jul’22.
* In line inflation does not change anything for policy makers: A combination of inline inflation and lower-than-expected IIP is not ideal, but it is unlikely to change anything for policy makers. We expect the RBI to hike policy rates by another 50-60bp in the remainder (four-months) of CY22, with a 25-35bp hike at its Sep’22 monetary policy meeting. This would take the repo rate to 6% by Dec’22.
II. IIP lower-than-expected in Jul’22
* IIP grew sequentially lower by 2.4% YoY in Jul’22 IIP growth stood at 2.4% YoY in Jul’22 as against 12.7% YoY in Jun’22 and 11.6% YoY in Jul’21. This number is lower than our forecast of 3.8% YoY as well as a Bloomberg survey of 4% YoY.
* due to an across-the-board contraction or deceleration: Surprisingly, mining activity contracted by 3.3% YoY in Jul’22 – its first decline in 17 months. Manufacturing activity decelerated to a four-month low of 3.2% YoY in Jul’22, and power generation touched a six-month low of 2.3% YoY.
* Production of consumer goods once again contracts in Jul’22: After a strong growth in May-Jun’22, there was a notable decline of 0.2% YoY in the production of consumer goods in Jul’22. Besides production of capital goods, infrastructure or construction activity also decelerated in Jul’22 from Jun’22 levels.
* Expect 2QFY23 real GVA growth of 5-5.5% YoY: With the actual IIP data for Jul’22, our in-house indicators for real GVA growth stands broadly unchanged at 7.2% YoY in Jul’22 (from 7.3% YoY estimated earlier). We continue to expect a 5- 5.5% YoY growth in real GDP in 2QFY23.
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