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Published on 16/08/2022 11:14:07 AM | Source: Motilal Oswal Financial Services Ltd

The Economy Observer; CPI inflation at a five-month low in Jul 22; IIP higher than expected in Jun 22 by Motilal Oswal Financial Services

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The RBI may hike repo rate by another 50-60bp by Dec’22

* CPI-based retail inflation came in at 6.7% YoY in Jul’22, at a five-month low. It was 7% each in the previous two months. The number is in-line with our forecast and Bloomberg survey.

* Food inflation in Jul’22 was at 6.7% YoY as against 7.8% YoY a month ago and 3.9% YoY in Jul’21. Within food, while inflation in ‘oil and fats’, ‘meat and fish’, ‘vegetables’, ‘milk and products’ came in lower in Jul’22 v/s Jun’22, that in ‘cereals and products’ and ‘pulses and products’ stood higher. Other important observations of the data release were: 1) core inflation (housing, clothing and footwear and miscellaneous) was at a 12-month low of 6% YoY in Jul’22 – exactly same as in Jul’21; 2) imported inflation (weightage =10%) eased to 13.8% YoY in Jul’22 as against 14.3% YoY a month ago and even domestically generated inflation came in lower at 5.9% YoY last month v/s 6.1% YoY in Jun’22; 3) while inflation in ‘services’ remained sticky at 5.1% YoY in Jul’22 compared to 5% YoY in Jun’22, that in goods decreased sharply to 7.1% YoY in Jul’22 as against 7.6% YoY in Jun’22; 4) Core CPI as per global standards (CPI excluding food and energy rose) rose to a three-month high of 6.3% YoY in Jul’22, lower than its peak of 6.5% YoY in Apr’22 and 5) CPI inflation in ‘miscellaneous’ items eased to 5.8% YoY in Jul’22, lowest in 26 months

* Separately, IIP growth stood sequentially lower at 12.3% YoY in Jun’22 as against 19.7%/13.7% YoY in May’22/Jun’21, respectively. The number is higher than our forecast and Bloomberg consensus of 10.3% YoY. With this, IIP in 1QFY23 stood at 12.7% YoY compared to only 1.8% YoY a quarter ago. All use-based categories including consumer goods, capital goods and infrastructure/construction activities decelerated in Jun’22 v/s May’22. Growth in all the major components – manufacturing, mining and electricity – also slowed down in Jun’22.

* With actual IIP data for Jun’22, our in-house indicators for real GVA growth stands broadly unchanged at 12.8% YoY in Jun’22 (from 13.1% YoY estimated earlier). Accordingly, we continue to expect ~10% YoY growth in real GDP in 1QFY23.

* A combination of lower inflation and higher-than-expected IIP growth is good news for the economy. Overall, there were barely any surprises in inflation data for Jul’22. We expect CPI to ease towards 6.0%/5.5% by 4QFY23/Mar’23, respectively. Therefore, we continue to expect that the RBI will hike repo rate by another 50-60bp by Dec’22.

* CPI inflation in line with expectation: CPI-based retail inflation came in at 6.7% YoY in Jul’22, at a five-month low. It was 7% each in the previous two months. The number is in-line with our forecast and Bloomberg survey

* because of five-month low food inflation: Food inflation in Jul’22 came in at 6.7% YoY as against 7.8% YoY a month ago and 3.9% YoY in Jul’21. Within food, inflation in ‘oil and fats’, ‘meat and fish’, ‘vegetables’, ‘milk and products’ came in lower in Jul’22 as against Jun’22. Other important observations of the data release are: 1) Core inflation (housing, clothing and footwear and miscellaneous) came in at 12-month low of 6% YoY in Jul’22 – exactly same as in Jul’21; 2) imported inflation (weightage =10%) eased to 13.8% YoY in Jul’22 as against 14.3% YoY a month ago and even domestically generated inflation came in lower at 5.9% YoY last month v/s 6.1% YoY in Jun’22 and 3) while inflation in ‘services’ remained sticky/increased marginally to 5.1% YoY in Jul’22 compared to 5% YoY in Jun’22, that in goods decreased sharply to 7.1% YoY in Jul’22 as against 7.6% YoY in Jun’22.

* CPI excluding food and energy actually grew in Jul’22: Core CPI as per global standards (CPI excluding food and energy) actually grew slightly to 6.2% YoY in Jul’22 from 6% YoY a month ago, which seems like a worry

* Lower inflation is definitely a relief: A combination of lower inflation and higher-than-expected IIP growth is good news for the economy. Overall, there were barely any surprises in inflation data for Jul’22. We expect CPI to ease towards 6%/5.5% by 4QFY23/Mar’23, respectively. Therefore, we continue to expect that the RBI will hike repo rate by another 50-60bp by Dec’22

 

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