Inflation - Core inches up - Edelweiss

Headline inflation came in higher than expected at ~7.6% YoY in August on account of a pick-up in agri-prices (oilseeds, pulses etc), a sharp revision in electricity tariffs (unchanged since late last year) and a rise in manufactured product inflation especially food products, fertilizers, and cement. Indeed, core inflation too picked up during the month to 5.6% from 5.4% previously, which is worrying and needs monitoring. Persisting input cost pressures (high energy and agri-prices) seem to be spilling over to manufactured products and a hike in diesel prices could further reinforce this trend. Accordingly, headline inflation is likely to climb up in the coming months before trending down towards the year end. As regards the monetary policy, despite the favourable move on fuel prices, we expect a status quo on policy rates in the forthcoming RBI meeting.

Inflation much higher than expected

Inflation for Aug came in at ~7.6% YoY, much higher than the expectation of ~7.2%, due to a rise in fuel and manufacturing inflation. Fuel inflation jumped up to ~8.3% YoY from ~6.0% YoY in July as the power tariff hikes taken by SEBs in past few months are now getting accounted in the inflation index. More worryingly, manufacturing (and core) inflation spurted due to a rise in textiles, cement and fertilizer prices. Indeed, core inflation (non-food manufacturing) came in at ~5.6% vs ~5.4% in July possibly on account of a rise in input cost pressures. Further, on a sequential basis (seasonally adjusted , 3MMA %), manufacturing inflation is rising since last two months.

Rise in core inflation needs to be monitored closely since, if this trend continues (which we think should not be the case given the economic slowdown ), it will effectively delay the rate cut cycle further. Meanwhile, as expected, prices of oilseeds picked up sharply, reflecting the impact of a deficient rainfall and drought like conditions in the US. Because of this, non-food article inflation jumped up to ~13.8% YoY from ~13.1% YoY in July. However, food inflation declined on the back of a fall in vegetable and fruit prices.

Meanwhile, inflation for June was revised higher to ~7.6% YoY from ~7.3%, reflecting an upward revision in electricity prices. This revision would also be seen in July numbers, currently at ~6.9%.

Weak monsoon hurts agri inflation

Agri-inflation has inched up in August. The adverse impact of deficient rainfall and (a general) rising trend in global food prices are getting reflected in domestic prices of pulses (up ~6.2% MoM in Aug in addition to ~8.1% MoM in July), oilseeds (up ~6.2% MoM in Aug in addition to ~8.5% MoM in July) and fibres (climbing up to ~3.4% MoM in Aug in addition to ~6.2% MoM in July).

In the coming months, the agri-inflation is expected to climb up on account of a global rise in food prices (because of drought like conditions in the US as India is a net importer of oilseeds) and a below-par monsoon though a recovery in the rainfall in August suggests that the uptrend in agri-inflation may not be very sharp. Notably, monsoon has recovered considerably in August, shrinking the aggregate seasonal deficit from ~22% of LPA as of Jul 25 to ~10% as of Sept 5.

Source : Equity Bulls

Keywords