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Inflation spiked to 7.44% led by perishables, mainly vegetables, thus inking the highest sequential monthly print on record. Core inflation fell to 5.0% YoY. We are currently tracking August CPI at 7.5%, and raise our FY24 forecast to 5.5% (RBI: 5.4%), while re-iterating our view of a continued rate pause, with upside risks from adverse weather conditions and global volatility.

Headline CPI shoots up to 7.44%, on the back of food price spike

CPI inflation sharply rose to 7.44% YoY in July (Emkay: 6.58%; Consensus: 6.50%; prior: 4.81%), led by a spike in food inflation, specifically vegetables. This is the highest inflation print since Apr-20, while the sequential momentum (2.99% MoM) is the highest on record. Food inflation (6.7% MoM) increased to 11.5% YoY vs 4.5% prior, with perishables leading the way. Vegetables (38.5% MoM) were the biggest culprit, with tomato prices rising a staggering 214% MoM! However, other vegetables like potatoes, onions, cabbage, cauliflower, chillies, etc also saw significant sequential momentum — in the 11%-46% range. Notably, of the 2.6ppts increase in headline inflation for July, 2.37ppts was contributed by vegetables. Prices of other food commodities also rose significantly — fruits (4.5% MoM), spices (3.6%), pulses (2.5%), cereals (1.3%) and sugar (0.8%). Prices for eggs (-0.5% MoM) and meat & fish (-2.1%) declined on account of lower demand during the Hindu Shravan month. Price of oils and fats (-1.0%) fell for the 8th consecutive month, while milk prices rose a modest 0.3%. Meanwhile, energy inflation rose at the fastest rate in a year (1.8% MoM), as higher electricity tariffs were introduced across the country

Demand-driven core inflation declines, albeit with robust sequential momentum

July core inflation (ex-food, fuel, intoxicants) fell to 5.0% YoY (prior: 5.2%) led by a favorable base effect, while sequential momentum was robust (0.4% MoM vs. 0.0% prior). This is the lowest print since Apr-20, and is the 5th month in a row of core inflation logging below 6%. The momentum was led by housing (0.5% vs -0.7% prior), recreation (0.5% vs 0.3% prior), education (1.1% vs 1.1% prior) and personal care (0.1% vs -0.3%). Going ahead, we expect further moderation in core CPI inflation, which is likely to fall to ~4.5% YoY in H2FY24E.

Lower Jun-23 IIP with weak sequential momentum

June IIP was lower than expected, rising 3.7% YoY (Emkay: 5.6%; Consensus: 5.0%; prior: 5.3%), albeit with broad-based growth. Sequential momentum was weak, albeit with most sectors apart from electricity, capital goods, and consumer durables seeing negative growth. Manufacturing output rose 3.1% YoY, with healthy growth in tobacco products, apparel, computer goods and other transport goods offsetting the decline in food and rubber & plastics products. Electricity rose 4.2%, while mining activity was up 7.6%. In use-based sectors, all sub-sectors other than consumer durables saw positive growth

RBI to look through the transient food spike and maintain a cautious stance

We are currently tracking August inflation at 7.5% led by continued upside risks for perishable food prices. The sharp sequential uptick in food-led (specifically perishables) inflation could continue till September, although various control measures are being enacted. Tomatoes are being imported from Nepal to ease the supply crisis, while the government is also releasing onions from the buffer stock, and has already announced significant imports of tur dal this year. Retail tomato prices seem to have peaked, but high prices of non-perishables such as pulses and spices are seeing some persistence. The RBI cannot do much to influence food supply management, but the ongoing spike adds pressure to stay vigilant on domestic dynamics, and the RBI is likely to look right through this transitory food price shock while maintaining a cautious stance. We mildly raise our FY24 inflation forecast to ~5.5% from 5.4%, assuming a much sharper correction in vegetable inflation in H2FY24E, thus implying a lower than expected FY24 inflation print than the RBI’s in Q4 (4.6% vs RBI’s 5.2%). We see core inflation undershooting headline by ~80bps in FY24E. We maintain that easing core inflation and sharp mean reversion in food price trends in H2FY24 will keep the RBI on hold, with focus on the durable elements of inflation.

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