Published on 15/09/2020 12:56:28 PM | Source: Emkay Global Financial Services Ltd

CPI to remain elevated till Oct`20, to keep RBI cautious on rate - Emkay Global

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CPI to remain elevated till Oct’20, to keep RBI cautious on rate

CPI remained elevated in Aug’20 at 6.7%, in line with our expectations. Demand-side pressure continued to be low at 4.2%. Increased WPI inflation was largely due to metal prices. The manufacturer margin might be under pressure going forward. The RBI would remain cautious as we believe that inflation should stay above 6% till Oct’20.

* Slight moderation in Food eases the headline inflation: Food inflation declined to 9.1% on account of an easing in cereals inflation. Rise in edible oils was largely a reflection of international prices. Rural food inflation rose sharply compared to urban areas. Internals of food inflation suggest that farm income growth might decelerate in Q2FY21 vs. Q4FY20. Fuel & light inflation surged in the urban areas but remained deflationary in the rural areas.

* Rise in demand from China: Increase in demand from China is one of the reasons for the spike in international food prices and in metals.

* Core CPI rises to 5.8%, but demand pressures remain low: Rise in gold & silver prices, increase in petroleum duties and hike in alcohol prices were the main reasons behind the surge in core CPI. Excluding these factors, demand pressure was low at 4.2%.

* Policy action: We believe that the RBI would remain cautious on the rate and may not cut more than 25bps in FY21. However, demand pressure due to the widening output gap is likely to keep underlying inflation pressure low as highlighted in PMI internals.


Food inflation remains elevated, matching the pace of FAO index

Food inflation stood at 9.1% yoy in Aug’20. Easing cereals inflation, the primary contributor to the farm income, might indicate narrow terms of trade in Q2FY21. It might ease further due to a little hike in Kharif MSP and record-high acreage in food grains, which rose 5%.

The FAO Index reflected a sharp uptick of 2% mom in food prices. The prices of vegetable oils and sugar further increased this month. International palm oil prices jumped in Aug’20 on account of production setbacks in major oil-producing countries and rising demand. This might be the reason for an uptick in oils & fats inflation in India to 12.4% yoy. Sugar price rose 6.7% mom, largely driven by unfavorable weather conditions in EU and Thailand. Rising demand from China was one of the main reasons behind an uptick in food prices and even metal prices. Jul’20 Inflation has been revised downwards by 19bps on downward revision in meat & fish, pan tobacco and recreation & amusement inflation.


Core inflation rises to 5.8%, demand pressures remain low at 4.2%

Core inflation rose in Aug’20 to 5.8% yoy, while we believe that demand pressures remained low. Uncertainty in the economy and risk-aversion led to the flight of capital to safe-haven assets like gold and silver (up 7% and 20% mom), whereas a hike in fuel was due to the rise in the excise duty by the Centre and states. Hence, it is evident that the demand-side pressures are not driving the prices, which is corroborated in manufacturing and services PMIs. Rental inflation eased to a 7-year low of 3.1% yoy and we believe that this would further ease in the ensuing months. Indexed freight rates have also collapsed quite significantly.


WPI at 0.2% indicating narrowing margins in manufacturing

WPI inflation rose to a five-month high of 0.2%. Edible oils and rise in metal prices pushed the inflation up this month. Overall, if we look at input vs. output inflation, the rise in input inflation has been quick, which is likely to narrow margins in Q2. This is also reflected in PMI reading. We believe that with demand pressure remaining low in the long run, the margin pressure is likely to build up going forward.


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