Impact: Neutral

Brief: On a year on year basis, July consumer inflation (CPI) has declined to a 9-month low 4.2%. Subsiding food inflation as well as a higher base are set to further help its (Combined CPI) cause.

Until recently, combined inflation rate was relentlessly accelerating - reaching 5% in June, 2018. The rapid growth was spread across the previous four months. The July print will therefore give confidence to not only the consumers but also the central bank – given mounting pressure on the latter’s inflation target (4%). The lower inflation rate is primarily driven by lower headline inflation, which has almost dropped by 120 bps to 2.3% in July, 2018. The headline portion of CPI contains both food and fuel categories and declines in this regard are reflected.

The core inflation however remains firm at 6%, during this reference period. Higher commodity prices and strong demand are expected to keep the core inflation on the upper side. Since supply side is massively influenced by rising input costs due to normalizing non-oil commodities, any price escalations are passed on to the end consumers. This phenomenon has caused the core inflation to remain strong. A weaker domestic currency is another contributor to this situation. Having said that, given a favorable base effect coming up August onward, we believe that inflation print may remain subdued in much of Q2 FY19. GST implementation and rationalizations will further aid lower prices.