Expect average IIP growth to moderate to around 4.1% in H2FY19 as against 5.1% in H1FYF19
We expect consumer price inflation (CPI) to remain benign in H2FY19. The upside risks from minimum support price (MSP) hikes, seventh central pay commission states’ HRA implementation, and imported inflation arising from the rupee depreciation should be somewhat mitigated by low food inflation. Core inflation, however, is expected to remain elevated. Given RBI MPC’s rigid focus on inflation and the expected benign trajectory in the near term, the scope for further rate hikes in FY2019 has diminished.
CPI inflation remains subdued
CPI inflation remained broadly flat at 3.77% in September after recording a 10-month low of 3.69% in August. Food inflation remained low at 0.5% led by a sequential fall in food prices of 1.1% month-on- month (m-o-m) (0.3% m-o-m in August). The fall in food prices was largely led by a sharp decline of 4.2% m-o-m in vegetable prices. Prices of fruits, pulses, sugar, eggs, and meat and fish continued to fall on a monthly basis. High-frequency data for October indicate further benign food prices. Fuel and light inflation remained elevated at 8.5% due to pass-through of higher crude oil prices. We expect CPI inflation to remain broadly below 4.5% in 2HFY19.
Core inflation moderate but remains elevated
Core inflation (including petrol and diesel), though elevated, moderated to 5.9% in September from 6.1% in August due to decline in housing inflation to 7.1% (7.6% in August). The monthly momentum in core CPI moderated marginally to 0.5% mom (0.6% in August). Transport and communication inflation, however, registered an increase of 6.4% (6% in August) on account of higher diesel and petrol prices. We expect core CPI inflation to average 5.8% in 2HFY19 (4.5% in FY2018).
IIP slides to a three-month low
IIP growth moderated to a three-month low of 4.3% in August after a downward revision of the July print to 6.5%. Manufacturing sector moderated to 4.6% led by muted growth in capital and consumer goods segment. Positives emerged from the expansion in electricity production by 7.6% (6.7% in July) and in the infrastructure and construction segment by 7.8% (9.2% in July). We expect the average IIP growth to moderate to around 4.1% in H2FY19 as against 5.1% in H1FYF19.
RBI likely to keep rates on hold in rest of FY19
After the recently concluded MPC meeting, we believe the focus of the committee remains purely on inflation prints, which is expected to remain benign in H2FY19 (expected in 3.0-4.4% range). We thus see limited scope for rate hikes in the rest of FY19. However, we remain watchful of the upside risks to inflation emanating from pass-through of MSPs, elevated crude oil prices, volatility in global financial markets, hardening of input prices amid rupee weakness, adverse implications from fiscal slippage, and staggered impact of HRA increases by states and its second-round impact. However, the seemingly structurally benign food inflation along with softening growth should help in capping the upside pressures, thereby providing RBI the comfort of staying on pause mode in the foreseeable future.
Edited extracts from Kotak Institutional Equities Research report