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Economy Research | CPI and IIP: Core concerns continue for retail inflation
Publish date: 13th June, 2018
We believe that the consumer price inflation (CPI) touched the 5% mark in June. Although we expect the CPI levels to slide marginally to 4.8% by March 2019, there are a few potential banana skins it needs to evade before that happens. High core inflation, effect of increased MSP to farmers and poor monsoon are some such factors that can trip our estimate.
The increase in retail prices is set to make the central bank hawkish as well. We expect the Reserve Bank of India (RBI) to announce another 25 bps rate hike in August.
But a lot has happened during that period. The company’s stocks have increased by 18% and its valuation has hit the ceiling. We don’t expect any advantages in buying the stocks at current levels.
Key Highlights
- Food and beverages inflation remained steady at 3.2% in June (3.3% in May), vegetable prices increased by 6% month over month (MoM) and pulses prices fell marginally by 0.7% MoM.
- We expect core inflation (including petrol and diesel) at 5.9% in FY2019, keeping the overall inflation at higher levels. The core inflation, which excludes food items, has been driven by high medical, education costs and rising gold prices.
- The country’s industrial output slumped — slipping from 4.8% in April to 3.2% in May — due to a weak demand for consumer non-durables. However, capital goods, electricity and mining showed an uptick in May.
- Since both core and headline inflation are expected to remain on the higher side, we feel the policymakers will hike rates by 25 bps. The rate hikes may also happen due to impact of MSP hikes and a poor monsoon.
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