IGI Logo

Beyond headlines, inflation is not comforting at all

Sharper fall in IIP imparts downward bias in 3QFY23 GDP growth

* Headline CPI-inflation came in at a 11-month low of 5.9% YoY in Nov’22, marking the first below-6% reading in CY22 and compared to 6.8% YoY in Oct’22. The number is much lower than Bloomberg consensus of 6.35% YoY.

* However, the details are not comforting. Almost the entire fall in the headline inflation is attributed to ‘Vegetables’, which declined 8.1% YoY in the month. Excluding ‘vegetables’ (weight = 6%), inflation was up 7% YoY last month, compared to 6.7% YoY each in the prior three months.

* Not surprisingly then, core inflation (excluding food & beverages, fuel & light and pan, tobacco & intoxicants) inched up to 6.3% YoY in Nov’22, from 6.2% YoY in Oct’22. Further details confirm that services inflation (weight = 23%) was broadly unchanged at 5.5% and the basket of CPI with 6%+ inflation increased to 56.2% in Nov’22 from 54.7% each in the previous two months.

* Separately, the index of industrial production (IIP) shrank 4% YoY in Oct’22, marking its worst fall in 26 months and much faster than an expected decline of 1% YoY. The contraction was broad-based as more than 71% of IIP basket posted a decline in Oct’22. The production of consumer goods declined 14% YoY, and the capital goods sector posted its first contraction (of 2.3% YoY) in 10 months.

* Overall, beyond headlines, inflation data was not comforting at all. Sticky core inflation, potential fear of producers passing on higher costs, and possible delayed price rises in services remain key risks to inflation. At the same time, even though IIP is very volatile, it is a key input to quarterly GDP estimates. Therefore, such unexpected and sharp contraction imparts downward bias in 3QFY23 GDP estimates, though we will still wait for Nov’22 data to make any revisions.

* Consequently, we continue to maintain that there will be at least one more rate hike of 25bp in Feb’23 by the RBI before considering any pause.

* CPI inflation at a 11-month low in Nov’22…: Headline CPI-inflation came in at a 11-month low of 5.9% YoY in Nov’22, marking its first below-6% reading in CY22 and compared to 6.8% YoY in Oct’22 (Exhibit 1). The number is much lower than Bloomberg consensus of 6.35% YoY. With this, CPI inflation in 8MFY23 stands at 6.9% YoY, lower than 5.2% YoY in the corresponding period in FY22, but much higher than the average inflation of 3.6% YoY over 8MFY18-20.

* …but it was only and only ‘vegetables’: An analysis of details suggests that the entire deceleration in headline inflation was led by vegetables, which declined 8.1% YoY (8.3% MoM) last month, compared to an increase of 7.8% YoY in Oct’22 (Exhibit 2). Excluding ‘vegetables’, CPI-inflation stood at 7% YoY in Nov’22, up from 6.7% YoY each in the previous three months.

* Details are not comforting at all: Further details confirm that the details are not comforting at all. Since the entire deceleration in CPI-inflation was led by ‘vegetables’, core inflation (all items excluding food & beverages, fuel & light and pan, tobacco & intoxicants) inched up to 6.3% YoY from 6.2% in Oct’22. Excluding food & energy, India’s core inflation was 6.5% YoY in Nov’22, compared to 6.6% in Oct’22. Also, services inflation (weight = 23%) was largely unchanged at 5.5% YoY in Nov’22, compared to 5.6% YoY in Oct’22 (Exhibit 3). An analysis of 299 sub-components shows that more than 56% of the CPI basket posted 6%+ inflation last month, up from 54.7% each in the previous two months (Exhibit 4).

* Policy choice likely to get very difficult: One must be cautious before getting too excited with the headline CPI data. While we see some reversal in the headline inflation in the coming months, it may stay at 6.2-6.3% YoY in Dec’22- Feb’23, before falling to 5.5% YoY in Mar’23. In any case, core inflation is likely to stay ~6% till Mar’23. Overall, beyond headlines, inflation data was not comforting at all. Sticky core inflation, potential fear of producers passing on higher costs and possible delayed price rises in services remain key risks to inflation. Thus, we continue to maintain that there will be at least one more rate hike of 25bp in Feb’23 by the RBI before considering any pause

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer