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CPI inflation unchanged at 7% YoY in Jun’22; lower-than-expected IIP in May’22

Expect a 25bp rate hike in the Aug’22 monetary policy meet

* CPI-based retail inflation came in at 7% YoY in Jun’22, similar to that in May’22. The number is lower than our forecast of 7.3% and Bloomberg consensus of 7.1% YoY. With this, CPI inflation stands at 7.3% YoY in 1QFY23 as against 6.3%/5.6% YoY in 4Q/1QFY22 and slightly lower than RBI forecast of 7.5% YoY.

* Food inflation in Jun’22 came in at a three-month low of 7.8% YoY in Jun’22 v/s our forecast of 8.8% YoY. Most food items, including vegetables, exhibited lower inflation, except ‘cereals and products’. Other important observations in the 12th Jul’22 data release are: 1) core inflation (housing, clothing and footwear, and miscellaneous) came in slightly lower at 6.2% YoY in Jun’22; 2) imported inflation (10% weightage) eased to an 18-month low of 14.1% YoY in Jun’22, though domestically generated inflation hardened marginally to 6.2% YoY; 3) while inflation in ‘services’ touched a 10-month high of 5% YoY in Jun’22, inflation in ‘goods’ softened slightly to 7.6% YoY in Jun’22; and 4) core CPI, as per global standards (CPI excluding food and energy) grew to 6.1% YoY in Jun’22 from 5.7% YoY in May’22, which appears worrisome.

* Meanwhile, IIP grew at 19.6% YoY in May’22 v/s 6.7% YoY in Apr’22. The number is lower than our forecast of 24.9% YoY and Bloomberg consensus of 20.7% YoY. Production of consumer goods grew 18.6% YoY in May’22 v/s only 2.5% YoY in Apr’22, driven entirely by the continued contraction (albeit slowly) in durables and non-durable goods in Apr’22. All three major components – manufacturing, mining, and electricity – grew faster in May’22 v/s Apr’22.

* With actual IIP data for May’22, our in-house economic activity indicator for real GVA (EAI-GVA) growth stands broadly unchanged at 18.5% YoY for the month (from 18.7% YoY estimated earlier).

* Overall, there were no major surprises in the data release on 12th Jul’22. Therefore, there are no major or additional implications for the monetary policy meet in Aug’22. We continue to expect a 25bp rate hike in Aug’22. Going forward, we expect headline inflation to stay ~7% YoY in 2QFY23 and ease towards 6.5% YoY in 4QFY23 (likely to come in below 6% in Mar’23). On the production front, we expect IIP to grow in double-digits in Jun’22, before easing sharply in 2QFY23. Accordingly, we expect ~9.5% YoY growth in real GDP in 1QFY23.

CPI inflation unchanged in Jun’22…:

CPI-based retail inflation came in at 7% YoY in Jun’22, similar to that in May’22. The number is lower than our forecast of 7.3% and Bloomberg consensus of 7.1% YoY. With this, CPI inflation stands at 7.3% YoY in 1QFY23 as against 6.3%/5.6% YoY in 4Q/1QFY22 and slightly lower than RBI forecast of 7.5% YoY.

On account of lower-than-expected food inflation:

Food inflation in Jun’22 came in at a three-month low of 7.8% YoY in Jun’22 v/s our forecast of 8.8% YoY and compared to a growth of 8% YoY in May’22. Most food items exhibited lower inflation, except ‘cereals and products’. Other important observations in the 12th Jul’22 data release are: 1) core inflation (housing, clothing and footwear, and miscellaneous) came in slightly lower at 6.2% YoY in Jun’22 v/s 6.3% in May’22 (refer Exhibit 1); 2) imported inflation (10% weightage) eased to an 18-month low of 14.1% YoY in Jun’22 (v/s 17.3% YoY in May’22), though domestically generated inflation hardened marginally to 6.2% YoY v/s 5.9% YoY in May’22 (refer Exhibit 2); 3) while inflation in ‘services’ increased to a 10- month high of 5% YoY in Jun’22 (v/s 4.6% YoY in May’22), inflation in ‘goods’ softened slightly to 7.6% YoY in Jun’22 from 7.8% YoY in May’22 (refer Exhibit 3).

CPI, excluding food and energy, actually grew in Jun’22:

Core CPI as per global standards (CPI excluding food and energy) actually grew slightly to 6.1% YoY in Jun’22 from 5.7% YoY a month ago, which appears worrisome (refer Exhibit 4).

Second consecutive month of lower inflation is a relief:

Overall, there were no major surprises in the data release on 12th Jul’22. Therefore, there are no major or additional implications for the monetary policy meet in Aug’22. We continue to expect a 25bp rate hike in Aug’22. Going forward, we expect headline inflation to stay ~7% YoY in 2QFY23 and ease towards 6.5% YoY in 4QFY23 (likely to come in below 6% in Mar’23).

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