Our trajectory for inflation, however, is slightly higher than that of MPC’s as we expect inflation to inch above 4% from November as against MPC’s projection of 3.5-3.8% for H2, FY20
Even as Consumer Price Index-based inflation (CPI) firms up, near-flat Index of Industrial Production (IIP) growth continues to underscore the cyclical slowdown. CPI inflation continues to remain comfortably below the RBI’s target of 4% and thus we continue to see room for another 25 basis points (bps) rate cut in the first half of FY20. We assign a higher probability of a rate cut in August as uncertainties surrounding the outcome of election, monsoon and Union Budget would have partly abated by then.
CPI inflation firms up further
The CPI hardened to 2.86% in March (Kotak estimate: 2.54%, Consensus: 2.80%) as against 2.57% in February. On a sequential basis, CPI firmed to 0.4% month-on-month (m-o-m) (0.2% in February). The strengthening is primarily due to an expected reversal in food inflation, which went up by 0.3% as against a contraction of (-) 0.7% in February. Sequentially, food inflation firmed to 0.6% m-o-m led by increases observed across vegetables, fruits, pulses, cereals, meat and fish, and milk. Eggs and spices, however, posted sequential declines. High frequency data suggests that food prices have continued to firm up in April. Fuel and light inflation hardened to 2.4% (1.2% in February). We expect CPI inflation to average 3.8% in FY2020.
Core inflation softens to 5.1%
Core inflation moderated sharply to 5.1% in March (5.4% in February) and to 0.2% mom (0.5% in February) on a sequential basis. Inflation across housing softened to 4.9% (5.1% in February) and in the transport and communication segment to 3% (3.1% in February). Inflation across household goods and services and education also saw some moderation while remaining elevated at 6% and 7.6%, respectively. Health inflation hardened to 8.9% (8.8% in February). The sequential pick-up in core inflation was due to increases observed across the transport and communication segment, recreation and amusement, and health. We expect the core inflation trajectory to gradually moderate to 4.2% in FY2020 on the back of muted growth.
IIP growth falls sharply
Weakness in demand weighed on the February IIP growth which cooled to 0.1% (Kotak: 1.3%, Consensus: 2%) as against a downward revised print of 1.4% in January. The moderation was primarily due to a contraction in manufacturing as was expectedly visible in the muted high frequency indicators for the economy. Growth in electricity production went up by 1.2% (0.9% in January) while growth in mining slowed to 2% (3.9% in January). Amongst the sectors, growth in capital goods contracted by 8.8% and intermediate goods by 4.9%. Growth in infrastructure/ construction softened to 2.4% and consumer durables to 1.2%.
Expect 25 bps cut in H1, FY20
CPI inflation hardened for the second consecutive month, even while continuing to remain well within the RBI’s target of 4%. In its latest meeting, the Monetary Policy Committee (MPC) had revised downwards the inflation trajectory by 30-40 bps through FY2020, led by expectations of benign food inflation and moderation in inflation expectations.
Our trajectory for inflation, however, is slightly higher than that of MPC’s as we expect inflation to inch above 4% from November as against MPC’s projection of 3.5-3.8% for H2, FY20. We continue to believe that the MPC would cut the repo rate by another 25 bps in H1, FY20, more likely in August as some of the uncertainties around El Niño, elections and consolidation fiscal situation would have abated by then.
Edited excerpts from
Kotak Economic Research report