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Higher inflation and a decline in growth worrisome

* CPI-based retail inflation came in at a five-month high of 7.4% YoY in Sep’22 as against 7% YoY in Aug’22. This number is slightly higher than a Bloomberg survey of 7.3% YoY, but is marginally lower than our forecast of 7.5% YoY. This marks the eighth consecutive month of above 6% CPI inflation.

* Food inflation came in at 8.6% YoY in Sep’22 – the highest in 22 months. This was led by a 108-month high in ‘cereals and products’ (weightage: 9.7%) inflation, at 11.5% YoY, in Sep’22.

* Other important observations are: 1) Core inflation (housing, clothing and footwear, and miscellaneous) stood at 6.3% YoY – higher than the 6.1% YoY in Aug’22; 2) While imported inflation (weightage: 10%) eased further to a 26-month low of 8.4% YoY in Aug’22, domestically generated inflation touched a 26-month high of 7.3% YoY in Sep’22; 3) Inflation in ‘services’ touched a 36-month high of 5.5% YoY in Sep’22, and that in goods inched up to a 20-month high of 8% YoY; 4) ‘Clothing and footwear’ saw a double-digit inflation of 10.2% YoY in Sep’22 (a 102-month high); and 5) Core CPI, as per global standards (CPI excluding food and energy), remained unchanged at 6.4% YoY in Sep’22.

* Surprisingly, IIP contracted by 0.8% YoY in Aug’22 as against a growth of 2.2% YoY in Jul’22. This number is contrary to Bloomberg expectations and our forecast of a 1.7% YoY growth in Aug’22. Consumer goods production declined by 6.9% YoY in Aug’22 after a minor fall of 0.7% YoY in Jul’22. After a weak 3% YoY growth in Jul’22, manufacturing actually fell by 0.7% YoY in Aug’22. Mining activity declined faster (down 3.9% YoY) in Aug’22, even as electricity generation continued to grow, albeit slowly, by 1.4% YoY.

* Overall, a combination of higher-than-expected inflation and a contraction in IIP in Aug’22 raises serious concerns over the future course of monetary policy. Whether we see a 35bp or a 50bp rate hike at RBI’s Dec’22 monetary policy meeting depends on: a) the Oct’22 inflation print, and b) the US Federal Reserve’s rate action on 13th Oct’22. In any case, we believe that the terminal repo rate can be 6.5% and global monetary tightening may pause in CY23.

* CPI inflation came in slightly higher than market expectations…: CPI-based retail inflation came in at a five-month high of 7.4% YoY in Sep’22, higher than the 7% YoY in Aug’22. This number is slightly higher than a Bloomberg survey of 7.3% YoY, but is marginally lower than our forecast of 7.5% YoY. This marks the eighth consecutive month of above 6% CPI inflation.

* …on account of an increase in food inflation, which touched a 22-month high: Food inflation came in at 8.6% YoY in Sep’22 – the highest in 22 months. This was led by a 108-month high in ‘cereals and products’ (weightage: 9.7%) inflation, at 11.5% YoY, in Sep’22. Inflation in ‘oil and fats’, ‘eggs and fruits’, and ‘sugar and confectionery’ came in lower in Sep’22. The more important observations in the 12th Oct’22 data release are: 1) Core inflation (housing, clothing and footwear, and miscellaneous) stood at 6.3% YoY – higher than the 6.1% YoY in Aug’22; 2) While imported inflation (weightage: 10%) eased further to a 26-month low of 8.4% YoY in Aug’22 as against 13.3% YoY in Jul’22, domestically generated inflation touched a 26-month high of 7.3% YoY in Sep’22 v/s 6.5% YoY in Aug’22; 3) Inflation in ‘services’ touched a 36-month high of 5.5% YoY in Sep’22, and that in goods inched up to a 20-month high of 8% YoY; and 4) ‘Clothing and footwear’ saw a double-digit inflation of 10.2% YoY in Sep’22 (a 102-month high).

* CPI, excluding food and energy, remains unchanged: Core CPI, as per global standards (CPI excluding food and energy), remained unchanged at 6.4% YoY in Sep’22.

* Higher-than-expected inflation raises concern: A combination of higher-thanexpected inflation and a contraction in IIP in Aug’22 raises serious concerns over the future course of monetary policy. Whether we see a 35bp or a 50bp rate hike at RBI’s Dec’22 monetary policy meeting depends on: a) the Oct’22 inflation print, and b) the Fed’s rate action on 13th Oct’22. In any case, we believe that the terminal repo rate can be 6.5% and global monetary tightening may pause in CY23.

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