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JUN-22 CPI INFLATION: ELEVATED BUT SEQUENTIAL RELIEF

15 Jul 2022

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KEY TAKEAWAYS

  • India’s CPI inflation stabilized marginally in Jun-22 at 7.01% YoY compared to 7.04% in May-22.
  • While broadly in line with consensus expectation, headline inflation continues to remain elevated above the 7.0% mark for the third consecutive month and above RBI’s upper threshold of inflation targeting band (i.e., 6.0%) for the sixth consecutive month.
  • Having said so, there were two broad positives accompanying this CPI print – one, for Q1 FY23, average CPI inflation stands at 7.3%, 20 bps lower than RBI’s projection of 7.5%.
  • Second, a broad-based slowdown in momentum was seen across food, fuel and core components of inflation owing to several Government measures which includes export ban on wheat and sugar along with the additional cut in excise duty on petrol and diesel announced in the month of May-22.
  • Over the last one month, two upside risks to inflation outlook have been partly addressed – one with respect to recovery in monsoon rainfall in Jul-22 and second, the correction seen in global commodity prices due to global slowdown concerns.
  • Nevertheless, we continue to expect an incremental 75 bps hike in repo rate between Aug-22 and Dec-22 keeping in mind the elevated inflation levels, fast evolving global monetary policy cycle and the risks emanating from the depreciation in the rupee.

India’s CPI inflation stabilized in Jun-22 at 7.01%YoY compared to 7.04% in May-22. While in line with consensus expectation, headline inflation continues to remain elevated above the 7.0% mark for the third consecutive month and above RBI’s upper threshold of inflation targeting band (i.e., 6.0%) for the sixth consecutive month. Having said so, there were two broad positives accompanying this CPI print –

  • One, for Q1 FY23, CPI inflation averaged at 7.3%, that is 20 bps lower than RBI’s projection of 7.5%
  • Second, a broad-based slowdown in momentum was seen across food, fuel and core components of inflation owing to Government measures on export ban on wheat and sugar along with the cut in excise duty on petrol and diesel announced in the month of May-22.

Key highlights of CPI inflation

  • Sequential CPI momentum halved to 0.52%MoM in Jun-22 from an average run rate of 1.1% over the months of Mar-May-22.
  • Food and Beverages momentum led the downside as it eased to 0.92%MoM after remaining in the range of 1.3-1.4% over the previous three months. While prices of Vegetables, Meat & Fish and Eggs continued to see a sizeable increment in Jun-22, the decline in price of Fruits, Edible Oils (for the first time five months) and pulses capped the upside.
  • Consolidated fuel prices declined by 0.59% MoM, marking the first drop in last six months. This was owing to a downward adjustment in retail price of petrol and diesel (post the excise duty reduction in third week of May-22) along with sequential decline in price of other fuel items such as Coke, Charcoal, and Electricity.
  • Core inflation (CPI ex indices of Food & Beverages, Fuel & Light, and petrol and diesel in Miscellaneous) momentum eased to 6.22% YoY in Jun-22 from 6.41% YoY in May-22, backed by seasonal contraction in Housing, continuing subdued price pressures in Pan, Tobacco & Intoxicants, and marginal softness of momentum in case of Clothing & Footwear, Health, and Recreation & Amusement.

Key highlights of WPI inflation
WPI inflation too eased marginally in Jun-22 to 15.18%YoY from 15.88% in May-22, with the index remaining virtually unchanged from previous month. This marked the lowest sequential momentum in as many as six months.
  • The sequential momentum in consolidated food prices eased for the second consecutive month to 1.25%MoM in Jun-22 from 1.91% in May-22. This was largely driven by a strong correction in price of manufactured food items in the month. Nevertheless, the momentum remains elevated on the back of summer seasonality in vegetable prices and late arrival of monsoon (price spike seen in case of Onions and Potatoes) and persistent global supply disruptions. As such, annualized consolidated wholesale food inflation touched a near 8-1/2 year high of 12.36% in Jun-22 vs. 10.97% in May-22.
  • The trend is similar in case of consolidated fuel prices that saw a moderation in sequential momentum to 3.24% MoM in May-22 from 4.20% in Apr-22 largely on account of excise duty relief. Nevertheless, the annualized fuel (consolidated) inflation inched up to a 6-month high of 45.75% in May-22 from 42.64% in Apr-22.
  • Manufacturing WPI registered its first sequential contraction in six months, with prices dropping by a sizeable 0.75%MoM. The decline was led by index-heavy weights of Base metals and Food, along with that of Furniture and ‘Other manufacturing’.
Outlook
In our last report, we had highlighted some upside risks to the overall sequential momentum in CPI inflation. Given the global and domestic developments since then, two of these risks have abated materially –
  • Global commodity prices have seen a material correction in recent weeks as risk of a pronounced global slowdown amidst aggressive monetary policy tightening in several countries has gained ground. India crude basket, after averaging at USD 112 pb and USD 118 pb in May-22 and Jun-22 respectively, has moderated to USD 104 pb in Jul-22 so far. The CRB Commodity Index has declined by 9% in June and a further 6% by mid Jul-22. The pass-through of such a correction could offer some reprieve to domestic price pressures.
  • Owing to a slow advancement, the country received less than normal rainfall in the month of Jun-22 at 8% below LPA (Long Period Average). Since the start of Jul-22, however, rainfall activity has picked up pace with cumulative rainfall for the season swinging into an 11% surplus (as of 13 Jul-22). Despite this, sowing of Rice and Oilseeds continues to lag comparable levels in 2022. The intertemporal and geographical spread of monsoon remains on watch, as a pick-up in Kharif sowing will be critical to assuage food price pressures especially in the post-harvest season i.e., Sep-22 onwards.
Negating these positives somewhat, is the risk of imported inflation with the depreciation in Rupee. While INR has outperformed vis-à-vis peers, it nevertheless has depreciated by 5.4% in FY23 so far. On balance, it appears that the correction in global commodity prices could outweigh the impact of rupee depreciation, from an inflation perspective.

Overall, we see upside and downside risks balancing each other and hence maintain our FY23 CPI inflation forecast of 6.7%. From monetary policy perspective, we continue to expect an incremental 50-75 bps hike in repo rate between Aug-22 and Dec-22. Post Dec-22, RBI could pause and reassess the evolving domestic growth-inflation scenario, in the global context.

Table 1: Key highlights of CPI inflation

Chart 1: Recovery of SW monsoon in Jul-22 should prove supportive of Kharif sowing