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CPI inflation inches up in May’19, IIP surprises positively
Rate cut in August on the cards
12 June 2019
The Economy Observer
CPI-based retail inflation inched up marginally to a seven-month high of 3.05% in May’19 from 2.99% a
month ago. The number was in line with consensus, and marginally higher than our forecast of 2.9%.
Higher headline inflation can primarily be attributed to food inflation, which rose to an 11-month high of
1.9% in May’19 due to an uptick in inflation in ‘vegetables’ from 2.9% in Apr’19 to 5.5% last month.
Core inflation (all items excluding ‘food & beverages’, ‘pan, tobacco & intoxicants’ and ‘fuel & light’) eased
to 4.2% YoY in May’19, the lowest level in 22 months.
Inflation in ‘core services,’ however, decelerated to a 10-month low of 5.6% in May’19 from 5.9% a month
ago, supported by a decline in inflation across its sub-categories.
Growth in Index of Industrial Production (IIP) inched up to a six-month high of 3.4% in Apr’19 v/s 0.4% a
month ago and 4.5% in Apr’18 (Exhibit 6). The IIP growth number is lower than both our forecast and
consensus of 1.6% and 0.6%, respectively. The rise was largely broad-based with the push coming from all
the three categories—manufacturing, mining and electricity.
Lower level of retail inflation and subdued GDP growth raise the possibility of a 25bp rate cut in the RBI’s
August monetary policy meeting, in our view. We expect inflation to cross 4% in Oct’19 and average 4.1% in
FY20, and IIP to average 3.7% in FY20, similar to that in FY19.
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I. Retail inflation
inches up marginally
CPI inflation at seven-month high…:
CPI-based retail inflation inched up
marginally to a seven-month high of 3.05% in May’19 from 2.99% a month ago
(Exhibit 1).
The number was in line with consensus, and marginally higher than
our forecast of 2.9%.
…on account of rise in food inflation:
The primary driver of higher headline
inflation was food inflation, which rose to an 11-month high of 1.9% in May’19
(Exhibit 3).
Higher food inflation was driven by ‘vegetables,’ which saw an uptick
in inflation from 2.9% in Apr’19 to 5.5% last month
(Exhibit 2).
After remaining in
the deflationary zone for 29 months, pulses inflation came in at 2.1% in May’19.
Overall, almost all sub-components of food posted higher inflation than a month
ago, except fruits, which witnessed deflation from 4.9% in April to 5.2% in
May’19. Non-food inflation was 3.8% YoY last month, the lowest level since
2012 when the current series began.
Core inflation at 22-month low:
Core inflation (all items excluding
‘food & beverages’, ‘pan, tobacco & intoxicants’ and ‘fuel & light’) eased to
4.2% YoY in May’19, the lowest level in 22 months.
Inflation in ‘core services’ eases further:
Inflation in ‘core services’ decelerated
to a 10-month low of 5.6% in May’19 from 5.9% a month ago (Exhibit 4),
supported by a decline in inflation across categories—household, health,
transport and communication, education, recreation and personal care. Notably,
‘transport and communication’ inflation was at a 12-month low of 3.9% and
‘education’ inflation at a seven-month low of 7.1%.
Policy rate cut in August remains on the cards:
Although marginally higher in
May’19, retail inflation remains subdued. Lower level of retail inflation and
subdued GDP growth raise the
possibility of a 25bp rate cut in the RBI’s August
monetary policy meeting,
in our view. We expect inflation to cross 4% in Oct’19
and average 4.1% in FY20.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agarwal
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.