Firm CPI reading continues to be led by a surge in vegetable prices. The near-term inflation outlook has been clouded due to seasonal factors, but we expect inflation scenario to improve in H2FY17, with March reading closer to RBI’s 5% estimate.
We continue to see room for additional 25 bps of rate cut in CY2016, with RBI likely to remain on a wait and watch mode in August.
CPI inflation remained firm in June at 5.77% y-o-y (5.76% in May), closely in line with our expectation of 5.71%. The pickup in prices was led largely by sequential uptick in food items and introduction of krishi kalyan cess of 0.5% since June.
Food prices surged to 7.8 % y-o-y (7.5% previously). Sequentially, food inflation increased 2.4% led by sharp surge in vegetable prices by 10% m-o-m (from 7.5% m-o-m in May). Encouragingly, the high frequency data for mandi prices indicates some pullback in the pace of increase in food prices in July so far, particularly of vegetables and pulses.
May IIP growth surprised to register 1.2%, the highest reading in three months. The positive surprise was largely on the manufacturing sector registering 0.7% y-o-y growth (3.9% m-o-m) led by a surge in capital goods (10.7% m-o-m) and consumer non-durables (3.8% m-o-m).
Even after witnessing near term seasonal upside risks to inflation trajectory, we retain our call for a 25bps of rate cut in CY2016, but would review further policy call in the new RBI regime.