CPI Inflation continues to surprise positively - CSEC Research

CPI Inflation increased 2.18% YoY in May 2017, slowing from a 2.99% rise in April and well below market expectations of 2.6%. The inflation hit a new record low for the second month as food prices fell for the first time ever since 2012 led by pulses and vegetables. On a sequential basis, CPI increased by 0.23% (same in April 2017).

- CPI inflation surprised with a sharp fall lead by fall in food prices. Inflation in food and beverages turned negative to -0.22% YoY vs. 1.21% YoY in April 2017. Vegetables and Pulses continued to show deflation at 13.38% & 19.45% respectively (8.59% YoY & 15.94% YoY in April 2017). Prices across the food basket softened during the month. Inflation in Fuel & Lighting basket witnessed slowdown though it remained at elevated levels with increase of 5.46% YoY (6.13% YoY in April 2017).

- With the change in base year to 2012, WPI rose 2.17% YoY in May 2017, compared to a 3.85% gain in April and way below market estimates of 3.11%. It was the lowest wholesale inflation since December 2016, as cost of manufactured products and fuel went up at slower pace while prices of primary articles declined. On sequential basis, WPI decreased by 0.35% vs. no change in April 2017.

Outlook:

Headline Inflation for the month of May declined largely on account of sharp fall in food prices. CPI inflation is remaining well within the revised range of projections (2-3.5%) of RBI in 1HFY18. However, sticky Core inflation still remains a cause of concern as it continues to remain at elevated levels. Going ahead, RBI does not expect the implementation of GST to have a material impact on the overall inflation and with revisions in projections of Inflation RBI has created a room for the future rate cuts. We expect RBI to cut 25bps in 2HFY18.

Source : Equity Bulls

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