CPI inflation came in at 7.01% in Jun’22, below expectations (Emkay: 7.03%), supported by easing food inflation. Food inflation eased in June with domestic prices moderating despite elevated global food prices. Global easing in food prices should also help in bringing down food inflation going forward. Despite the impact of the fuel excise duty cuts, energy inflation remained elevated at 10.39% (1.03% mom) due to electricity tariff hikes in many states.
However, sticky fuel prices, along with higher kerosene and LPG prices, GST hikes and gold import duties could all act as near-term drivers for the headline print, said a report by Emkay Research.
India’s retail inflation based on consumer price index (CPI) stood at 7.01% in June, data released by government showed on Tuesday. This the third straight month when the inflation numbers have stayed above 7 per cent and the sixth month in a row when the figures have remained above Reserve Bank of India‘s (RBI) tolerance band of 2-6%.
Inflation continues to be broad based which is a worry. With the exception of housing all other segments have registered inflation of above 6%. The food and beverages basket is a worry at 7.6% with vegetables registering growth of 17.4% followed by vegetable oils and fats and fish products.
There appears to be little respite here. The move to lower duties should help in lowering prices of oils though inflation would continue to be high. The other interesting thing about inflation is the variation cross states – half of the 22 had inflation above 7%. The lowest was in Bihar at 4.7% and the highest in Telangana at 10%. Such noise is noteworthy as it shows how prices range – driven by food products mainly and general cost of living, said Bank of Baroda.
The report by Emkay highlighted that the near-stable headline (7.01%) and core (6.23%) inflation prints for June are attributable to a favorable base effect and a sequential easing in both and this was further helped by fiscal efforts to reduce inflationary pressures, driven by excise duty cuts on motor fuels, a ban on wheat exports and a reduction of import duties on some food products.
At 7% in June’22, headline consumer inflation continued to remain outside the RBI comfort zone with broad-based price rise across almost all the categories. Although elevated, various central government measures in the last two months such as reduction in petrol and diesel excise duties, cut in import duty on edible oils, curtailment measures on food exports, etc. helped contain inflation in June as seen in softened sequential price growth.
The near-term consumer inflation outlook remains a little uncertain. The global commodity prices have started peaking out due to slowdown in global demand, while the wide gap between wholesale and retail prices continues to indicate further transmission of input costs to the consumers, said Vivek Rathi, Director-Research, Knight Frank India.
We are currently tracking July inflation at 6.7-6.8%, with the Q2FY23E print at 7-7.1% – lower than the RBI’s forecast of 7.4%. Thus, it could mark a downward surprise for the central bank. This is, however, unlikely to derail the RBI’s front-loaded tightening path amid still-elevated inflation. We maintain our FY23 CPI inflation estimate at 6.5% with a mild downward bias (RBI: 6.7%). FY23 could see rates go up by 75bps+, with the RBI now showing its intent to keep real rates neutral or higher, the report added.
The retail inflation is softening albeit at a slower pace over the past three months. However, it still 3 straight months of inflation remaining above 7% and six straight months of inflation above the RBI’s aim of 6%. The slight softening in inflation data is largely on account of a reduction in duties on fuel. We expect the inflation prices to harden going forward as high prices of crude and the impact of monsoon are factored in fully, said Nish Bhatt, Founder & CEO of investment consulting firm Millwood Kane International.
Industrial Production Growth
The Index of Industrial Production (IIP) grew 19.6% YoY in May’22, thanks to the extremely favorable base effect stemming from the second wave of the pandemic, as well as sequential momentum. Manufacturing grew 20.6%, driven by segments such as electrical equipment, chemicals and apparel. Mining at 10.9% YoY and electricity at 23.5% YoY also saw healthy growth, said the report.
IIP growth of 19.6% is higher than our expectation of 14.5%, but has been statistically driven with all components witnessing high growth rates. Within manufacturing barring pharma, which had negative growth, all industries posted impressive growth. This was also reflected across the primary, intermediate and infra goods. Within consumer goods, non-durables registered feeble growth of 0.9% which can be attributed to the inflation impact as companies have been passing on input costs which in turn could have impeded consumption, said Bank of Baroda.
Overall growth should be viewed with caution even though the cumulative two month performance of 12.9% is impressive. The future course will depend on how consumption fares which will be driven by inflationary trends. As households spend more on necessities, there could be cut back on non-discretionary spending as prices rise. This can be a stumbling block for industrial growth. The infra based industries are likely to sustain with government capex leading the way. But to be sustained we need to see private investment also pick up which is still feeble today, the bank added.
Bhatt said it was encouraging to see industrial production rising over the past few months, but most of it is due to the lower base of last year when the country was witnessing the second wave of the pandemic, adding that the frequency indicators, like higher tractor sales, and CV in rural areas indicate a pick-up in demand and the industrial production activity is expected to continue on its upward trend.
Rate hikes in coming months
The CPI inflation broadly remained steady around 7% bringing the 1QFY23 average to 7.3% — marginally lower than RBI’s projections of 7.5%. Nonetheless, inflation is expected to remain elevated with only a gradual descent through the rest of the year. While the softening global commodity prices provide some relief, the gains will be limited due to weakening INR. We expect the MPC to continue to frontload policy rate hikes especially as global monetary tightening continues, said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank, adding that the bank expects 85-110 bps of additional rate hikes in the coming few meetings to bring the Repo rate towards 5.75-6% by end of FY23.
According to estimates, a maximum tightening of the policy rate by 6% by FY23 is expected, of which liquidity tightening to 2% of NDTL is tantamount to another estimated 25 bps effective rate hike. The front-loaded rate hike cycle does not imply a lengthy tightening cycle, and once they reach the supposed neutral pre-Covid monetary conditions, the bar for further tightening may go higher incrementally amid increasing growth and inflation trade-offs, said the Emkay report.
We reckon that amid the persisting slack, the flat Phillips curve may call for a larger output sacrifice to contain inflation. A judicious policy mix is needed as economic agents share the burden of the global shock. To that extent, the countercyclical fiscal shield provided can also be an effective lever while the monetary sword takes hold, the report added.
Bank of Baroda said there will be less solace for monetary policy, another rate hike may be expected albeit of 25 bps and the future trajectory would also tend to be above 6.5% with the base effect becoming weaker statistically.