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CPI inflation is likely to have peaked at 7.8% YoY in Apr’22

An aggressive rate hike cycle is not recommended at this stage

* Headline CPI inflation came in at 7.8% YoY in Apr’22 as compared to 7% YoY in Mar’22. The number is higher than our forecast of 7.2% and a Bloomberg survey of 7.4% YoY. This was on account of higher food and fuel and light inflation. While food inflation came in at a 17-month high of 8.4% YoY in Apr’22, fuel and light inflation stood higher at 10.8% YoY in Apr’22 as against 7.5% YoY in Mar’22.

* However, a deeper dive into detailed CPI items suggests a lesser concern. A) Imported items inflation (CPI weightage: ~10%) was at a four-month high of 19.6% YoY in Apr’22, thereby contributing ~2pp to overall CPI inflation. On the other hand, domestic CPI inflation stood at 6.4% YoY in Apr’22 v/s 6% YoY in Mar’22. B) Core inflation (all items excluding food and energy) came in line at 6.5% YoY in Apr’22 v/s 6.2% YoY in Mar’22. C) While inflation in services (housing and core services) stood at 5% YoY in Apr’22 as compared to 4.7% each in the preceding four months, goods inflation stood at 8.6% YoY in Apr’22 v/s 7.6% YoY in Mar’22.

* Separately, IIP growth in Mar’22 stood at 1.9% YoY v/s 1.5% YoY in Feb’22. Although growth is higher on a monthly basis, it stood at 1.6% YoY in 4QFY22 v/s 2.1% YoY in 3QFY22. What’s worrying is the 4.3% YoY contraction in consumer goods production (both durable and non-durable) in Mar’22 – its sixth consecutive decline. Capital goods production grew by only 0.7% YoY in Mar’22 v/s a 2% YoY growth in Feb’22. Growth in infrastructure and construction activities also moderated in Mar’22.

* Going forward, while CPI inflation is likely to remain ~7% YoY in 1HFY23, it is expected to ease towards 6.5% YoY by the end of CY22 and to sub-6% YoY by Mar’23. Considering a weaker growth forecast and a stable core inflation, we continue to argue that India should resist an aggressive and deep rate hike cycle.

* Headline CPI at a 95-month high in Apr’22…: CPI-based retail inflation came in at an alarming rate of 7.8% YoY in Apr’22 as compared to 7% YoY in Mar’22. The number is higher than our forecast of 7.2% and a Bloomberg survey of 7.4% YoY

* …on account of higher food and fuel and light inflation…: Food inflation came at a 17-month high of 8.4% YoY in Mar’22 due to consistently high inflation in vegetables, cereals, fruits, etc. Inflation in fuel and light too stood higher at 10.8% YoY in Mar’22 as against 7.5% YoY in Mar’22.

* …but a deeper dig into CPI items would suggest a lesser concern:

* Imported items inflation (weightage: ~10%) was at a four-month high of 19.6% YoY in Apr’22, thereby contributing ~2pp to overall CPI inflation. On the other hand, domestic CPI inflation stood at 6.4% YoY in Apr’22 v/s 6% YoY in Mar’22.

* Core inflation (all items excluding food and energy) came in line at 6.5% YoY in Apr’22 v/s 6.2% YoY in Mar’22.

* While inflation in services (housing and core services) stood at 5% YoY in Apr’22 as compared to 4.7% each in the preceding four months, goods inflation stood at 8.6% YoY in Apr’22 v/s 7.6% YoY in Mar’22.

* Aggressive rate hikes not recommended at this stage: Going forward, while CPI inflation is likely to remain ~7% YoY in 1HFY23, it is expected to ease towards 6.5% YoY by the end of CY22 and to sub-6% YoY by Mar’23. Considering a weaker growth forecast and a stable core inflation, we continue to argue that India should resist an aggressive and deep rate hike cycle.

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