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 Prospects of interest rate cuts still far away

*Headline CPI inflation came in at 5.7% YoY in Dec’23 vs. 5.6% in Nov’23, mainly led by 48-month low core inflation at 3.8% (vs. 4.1% in Nov’23). It was partly offset by higher food inflation at 9.5% in Dec’23 vs. 8.7% in Nov’23 (Exhibit 1). The number was lower than the Bloomberg consensus of 5.9% and our forecast of 6.3% as inflation in core components and vegetables came in lower than our expectations. CPI inflation averaged 5.4% in 3QFY24, which is lower than the RBI expectations of 5.6%.

* Food inflation came in at 9.5% YoY in Dec’23 vs. 8.7% in Nov’23 and 4.2% in Dec’22. It decreased 0.9% MoM in Dec’23. Details suggest that the acceleration in food inflation was mainly due to vegetable prices (weight = 6%), which rose 27.6% YoY, following a 17.7% YoY increase in Nov’23. CPI ex-veggies slid to a 48-month low of 4.4% YoY (lowest since Dec’19) from 4.7% last month. At the same time, inflation in cereals, pulses, and spices remained sticky in double digits.

* Notably, core CPI (excluding food & beverages and fuel & light) came down to 3.8% in Dec’23 from 4.1% in Nov’23, the lowest in almost 48 months. The deceleration was broad-based.

* Other details suggest that: (1) Goods inflation remained firm at 6.4% in Dec’23 (6.2% in Nov’23), while services inflation came in at 3.4% (vs. 3.5% in Dec’23), lowest since 2015. Core services inflation slid to 3.3%, the lowest since 2015 (Exhibit 3). (2) Details of 299 items suggest that 64% of the basket posted less than 5% inflation in Dec’23 (vs. 58% in Nov’23), the highest since Feb’20 (Exhibit 4). (3) Prices of imported items declined further by 2.1% YoY in Dec’23 (vs. -1.7% in Nov’23), while domestically generated inflation increased to 6.9% YoY in Dec’23 vs. 6.6% in Nov’23, the highest in four months.

* IIP decelerated to a 13-month low of 2.4% YoY in Nov’23 (vs. 11.6% in Oct’23, revised lower from 11.7%). The deceleration in growth was mainly led by a high base (7.6% in Nov’22) and fewer working days in Nov’23 due to Diwali holidays. The number is lower than the Bloomberg consensus of 4% and our forecast of 4.9%. During Apr-Nov’23, industrial output grew 6.5%.

* Growth in manufacturing activity decelerated to 1.2% in Nov’23 vs. 10.2% in Oct’23 and 6.7% in Nov’22. Lower growth in manufacturing output was mainly due to lower factory activity in Nov’23 during Diwali holidays. Details of the manufacturing sector confirm that as much as 80.6% of the items within the sector grew at a lower rare than last year (vs. 1% in Oct’23) and 55.3% of the items posted a contraction (vs. 4.1% growth in Oct’23).

* According to the use-based classification, output of capital goods and infra & construction goods contracted in Nov’23. Capital goods output contracted by 1.1% in Nov’23 (worst in 13 months) vs. 21.3% growth in Oct’23 and 20.7% in Nov’22. Growth in infra & construction goods decelerated to 1.5% in Nov’23 vs. 11.3% in Oct’23 and 14.3% in Nov’22. Consumer goods contracted by 4.3% in Nov’23 vs. a growth of 11.7% in Oct’23 and 8.1% in Nov’22.

* Overall, inflation came in much better than expected; however, industrial output growth remained weak. With the Dec’23 print at 5.7%, CPI averaged 5.4% in 3QFY24, lower than the RBI forecast of 5.6%. Though the inflation number is better than expected, we believe that the prospects of rate cuts are still far away. Going forward, we expect moderation in 3QFY24 real GDP growth and expect inflation to remain at ~5.8% YoY in 4QFY24. Poor rabi sowing and deteriorating reservoir levels are upside risks to the food inflation trajectory and need to be monitored.

* CPI inflation at 5.7% in Dec’23, much lower than market expectations:

Headline CPI inflation came in at 5.7% YoY in Dec’23 vs. 5.6% in Nov’23, mainly led by 48-month low core inflation at 3.8% (vs. 4.1% in Nov’23). It was partly offset by a higher food inflation at 9.5% in Dec’23 vs. 8.7% in Nov’23 (Exhibit 1). The number was lower than the Bloomberg consensus of 5.9% and our forecast of 6.3% as inflation in core components and vegetables came in lower than our expectations. CPI inflation averaged 5.4% in 3QFY24, which is lower than the RBI expectations of 5.6%.

* Food inflation at 9.5% in Dec’23:

Food inflation came in at 9.5% YoY in Dec’23 vs. 8.7% in Nov’23 and 4.2% in Dec’22. It decreased 0.9% MoM in Dec’23. Details

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