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Headline relief, but core pressures steady

* December CPI inflation surprised yet again on the downside, at 5.72%, led by easing food prices, while core inflation stayed sticky at 6.31%. Sharp sequential correction in prices of vegetables, fruits and meat helped food inflation, even as prices of cereals, eggs, dairy, spices, etc. continued to climb. Coreinflation stickiness reflected the persistent demand for services. Higher gold prices plus stickiness in education and health prices also aided the momentum, while housing inflation was generally benign.

* Food inflation should provide further relief ahead, with a healthy winter harvest so far. While prices of some components of food (milk, spices, etc.) may remain on the higher side, food inflation is likely to remain sub-6% in coming months. Easing global commodities including energy in general, if sustained, should release some cost pressures and may spill over to output prices (core) as well.

* However, near-term pressures could arise from imported inflation through China reopening-led sustained upside risk to global commodities, uncertain FX and from sticky services inflation. With domestic demand being fairly resilient, core CPI pressure may remain reasonably sticky sequentially, in the near term. That said, lower imported inflation, slower demand amid monetary transmission, and base effects should directionally still imply lower inflation in FY24.

* We are currently tracking January inflation at 5.8%, with the FY23 average at ~6.5%. The concurrent real repo rate is fairly positive, but still provides space for another shallow hike, of up to 25bps, to reach a neutral rate (albeit, not necessarily implying an end of the cycle). We still think that the RBI would not turn too restrictive. But we reckon the situation is fluid and the extent of global disruption and disinflation will remain key to the RBI’s reaction function ahead.

CPI inflation at twelve-month low, led by sharp fall in food inflation

CPI inflation further moderated to 5.72% in December, well below expectations for a second consecutive month (Emkay: 5.94%; Consensus: 5.90%; prior: 5.88%), led by sharper-than-expected fall in food inflation, as well as a favorable base effect. This is now a 12-month low for headline inflation, making the 3QFY23 average at 6.1% vs 6.6% that the RBI estimated, and is likely to see an undershoot from the RBI’s forecast by ~30bps in 4QFY23 as well. Food inflation slumped again (4.2% YoY, 4.7% prior), with significant sequential contraction led by vegetables and other perishables. Vegetable prices cratered (-12.7% MoM; -15.1% YoY), while prices of fruit, meat & fish, oils & fats, and sugar also saw sequential contraction. However, prices of cereal and eggs, along with those of dairy and spices, continued to see noteworthy increases. High-frequency mandi prices show vegetable prices falling further, but prices of fruits, pulses and cereals could be marginally higher. Separately, energy inflation remained elevated (11.0% YoY, 0.4% MoM).

Demand-driven core inflation stays sticky at 6.3%, with elevated personal-care and household costs

Core inflation (ex-food, fuel and intoxicants) increased to 6.31% YoY (0.3% MoM vs 0.4% prior), largely due to higher prices of household goods & services, clothing, and personal care & effects (led by higher gold prices). Core inflation has been persistent at 6.2-6.3% for eight straight months now, with the RBI raising this as a concern at its most-recent MPC meeting. The higher sequential momentum in healthcare, T&C, recreation, educational and personal care (led by higher gold prices) was offset by slower growth in household expenses as well as clothing costs, while housing costs remained benign. Lower input costs could mildly help moderate core inflation, but the near-term sustained demand for services is likely to put pressure, as indicated by the high output prices in PMIs.

November IIP sharply expands, on favorable base effect

November IIP growth surprised on the upside, growing 7.1% YoY (Emkay: 2.3%; Consensus: 2.8%; prior: -4.2%), with a broad-based upturn due to a favorable base effect. October and November are generally volatile months due to the vagaries of the festive season. The 3MMA IIP growth is at a more reasonable 2.1%. Manufacturing output rose by 6.1% YoY (6.5% MoM), with segments such as food products, leather goods, pharma and electrical equipment supporting growth. Electricity grew 12.7%, but fell 1.5% sequentially, while mining increased 9.7%, with strong sequential momentum as well (9.1% MoM). In use-based sectors, consumer durable and consumer nondurable goods improved 5.1% and 8.9% YoY, respectively, while other sub-segments also saw growth. The overall IIP index has finally moved 2.2%, above pre-Covid levels (after staying below pre-Covid levels since Jul-22).

FY23 CPI to average near 6.5%; FY23 has one more hike in store

We are currently tracking February inflation at ~5.8% and see average FY23 inflation at ~6.5%. While some components of food (milk, spices, etc.) may remain on the higher side, on net food inflation likely remaining sub6% in coming months. Additionally, the pass-through of lower imported costs will drag core CPI a bit lower, albeit with a lag, while resilient domestic demand and sticky services inflation still remains a risk. The concurrent real repo rate is fairly positive, but still provides space for another shallow hike, of up to 25bps, to reach a neutral rate (albeit, not necessarily implying an end of the cycle). We still think that the RBI would not turn too restrictive; but the extent of global disruption will remain key to the RBI’s reaction function ahead. India Equity Research | CPI/IIP Review January 12, 2023 India Economy CPI Inflation Refer to important disclosures at the end of this report Headline relief, but core pressures steady This report is intended for team

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