September inflation marks a peak - YES Securities

India's CPI inflation for the month of Sep-20 rose to an 8-month high of 7.34% YoY from 6.69% YoY in Aug-20 primarily on account of higher food prices. While we expected inflation to increase, the actual print came in marginally higher than our estimate of 7.27%YoY (Bloomberg consensus: 6.90%). The print marks sixth consecutive month of the breach of the upper threshold for policy tolerance, pegged at 6%. On sequential basis, CPI inflation inched up by 1.16% MoM as against a decline of 0.52% in Aug-20.

Food inflation shoots up

After a brief respite in the month of Aug-20, food prices rose with overall food inflation rising to an 8-month high of 9.73% in Sep-20 from 8.29% in Aug-20. On sequential basis, food inflation shot up by 2.09% MoM from 0.64% MoM. The increase was primarily led by Vegetables (+12.0% MoM), Eggs (+5.70% MoM), Oil & Fat (+1.37% MoM) and Non-alcoholic beverages (+1.20% MoM).

Within Vegetables, the spike was predominantly on account of spike in onion prices which rose by ~60% MoM in Sep-20 from 11% in the previous month. Post last year's onion price shock, the government had set itself a target of procuring ~1 lakh metric tonnes in its buffer stock. However, as per media reports the government has been able to procure only 45% of the target thereby giving rise to concerns over another price shock in so called lean season between October and December.

Fuel inflation remains ranged-bound

Fuel inflation moderated to 2.87% YoY in Sep-20 from 3.18% in the previous month. The moderation was driven by decline in Diesel and Kerosene prices. However, on sequential basis fuel inflation rose by 0.21% in Sep-20 from a contraction of 0.07% in Aug-20.

Demand side inflation eases marginally

Core Inflation, which is seen as a proxy for underlying domestic demand, moderated to 5.36% YoY in Sep-20 from 5.44% YoY in Aug-20. The decline was led by Personal Care and Recreation and amusement. While insufficient in overall magnitude some offsetting impact came from Education, Transport and communication, and Clothing. Nevertheless, overall core inflation continues to stay above 5% for the third consecutive month.

Our take

Since the commencement of FY21, each month has recorded a breach of the upper threshold of policy tolerance, taking the average CPI for H1 FY21 to 6.75% YoY as compared to 3.27% in H1 FY20, primarily on account of cost-push and supply-side disruptions along with few domestic idiosyncrasies. As far as food is concerned, we expect price pressures to normalize going forward with arrival of kharif output, backed by strong sowing along with prospectus of robust rabi sowing due to improved soil moisture content and healthy reservoir levels. This is expected to provide seasonal disinflationary momentum to overall inflation in H2 FY21. While core inflation could remain sticky in the near term, as supply capacity catches up with pre COVID levels, overall demand conditions (that have softened in the interim on account of job losses/pay cuts, etc.) could soon become a binding constrain.

Source : Equity Bulls

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