E

CO

S

COPE

CPI inflation in line with expectations

Expect RBI to prioritize weak GDP growth over higher inflation



13 November 2019

The Economy Observer









CPI-based inflation came in at 4.6% in Oct’19, in line with our estimate and slightly higher than consensus of

4.4%. Note that inflation stood at 4.0% in Sep’19 and 3.4% in Oct’18.

Food inflation was at 7.8% in the month, higher than our estimate of 7.2% and 5.1% in Sep’19, primarily led

by ‘Vegetables,’ where inflation inched up to a 21-month high of 26.1% from 15.5% in the previous month.

Inflation also accelerated to 3.1% in ‘Milk and Products’ and 2.2% in ‘Cereals and products.’ The

aforementioned three items together constitute ~22% weight in the CPI basket.

As against our expectation of 3.7%, core inflation (excluding ‘Food and beverages’, ‘Fuel and light’ and ‘Pan,

tobacco and intoxicants’) came in at 3.3% in Oct’19 – the lowest since the new series began in 2011.

Inflation in ‘core services’ decelerated to a 21-month low of 3.9% in Oct’19 from 4.8% a month ago, driven by

lower inflation in all services (household, health, transport and communication, education, personal care),

except recreation, wherein there was slight acceleration.

Even though retail inflation has jumped to 4.6% YoY in Oct’19 from 3.3% just two months ago, we expect the

Reserve Bank of India (RBI) to place more primacy on growth slowdown than higher inflation. Accordingly,

we expect another rate cut in Dec’19. We continue expecting headline inflation to touch 5% around Dec’19-

Jan’20 and stay put until Mar’20. Further, we expect core inflation to have bottomed out and pick up only

gradually to 4% by Mar’20.

I. Retail inflation

accelerates to 16-month high







CPI inflation in line with our estimate…:

CPI-based inflation came in at 4.6% in

Oct’19, in line with our estimate and slightly higher than consensus of 4.4%.

Note that inflation stood at 4.0% in Sep’19 and 3.4% in Oct’18 (Exhibit

1).

…entirely driven by higher food inflation…:

Food inflation (excluding non-

alcoholic beverages and prepared meals) was at 7.8% YoY in Oct’19 (higher than

our estimate of 7.2%) compared to 5.1% a month ago. All items within food,

except ‘Meat and Fish,’ exhibited higher inflation in the month. The highest

contribution came from ‘Vegetables,’ where inflation accelerated to a 21-month

high of 26.1% YoY in Oct’19 from 15.5% in the previous month (Exhibit

2).

Inflation also accelerated to 3.1% in ‘Milk and Products’ and 2.2% in ‘Cereals and

products.’ The aforementioned three items together constitute ~22% weight in

the CPI basket. Separately, ‘Fuel and Light’ remained in deflation, and ‘Pan,

tobacco and intoxicants’ inflation declined during the month.

…as core inflation was at record-low:

As against our estimate of 3.7%, core

inflation (inflation excluding ‘Food and beverages’, ‘Fuel and light’ and ‘Pan,

tobacco and intoxicants’) was at 3.3% in Oct’19 – the lowest since the new

series began in 2011. Inflation in ‘housing’ dropped to 4.6% from 4.8% a month

ago, while that in ‘miscellaneous’ items fell to 3.5% from 4.5%. The only item

that held core at its level was ‘Clothing and Footwear,’ where inflation rose to

1.7% in Oct’19 from 1% in the previous month

(Exhibit 3).

Nikhil Gupta – Research Analyst

(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555

Yaswi Agarwal

– Research Analyst

(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.





‘Core services’ inflation at 21-month low:

Inflation in ‘core services’

decelerated to a 21-month low of 3.9% in Oct’19 from 4.8% a month ago, driven

by lower inflation in all services (household, health, transport and

communication, education, personal care), except recreation, wherein there

was slight acceleration.

RBI to prioritize weak GDP growth over higher inflation:

Even though retail

inflation has jumped to 4.6% YoY in Oct’19 from 3.3% just two months ago, we

expect the Reserve Bank of India (RBI) to place more primacy on growth

slowdown than higher inflation. Accordingly, we expect another rate cut in

Dec’19. We continue expecting headline inflation to touch 5% around Dec’19-

Jan’20 and stay put until Mar’20. Further, we expect core inflation to have

bottomed out and pick up only gradually to 4% by Mar’20.

Exhibit 2: …entirely driven by higher food inflation

Cereals & products

Pulses & products

Sugar & products

Vegetable

Other 'food & beverages'

Pan, tobacco & intoxicants

(0.02)

Fuel & light

Housing

(0.02)

Clothing & footwear

Fuel for vehicles

Other 'Miscellaneous' items (0.27)

0.05

0.06

0.02

0.22

0.01

0.05

0.00

(pp)

Exhibit 1: CPI inflation rises to 16-month high in Oct’19…

7

6

5

4

3

2

1

Oct-15

Oct-16

Oct-17

Oct-18

Oct-19

* Excluding F&B and F&L

4.6

3.3

Headline CPI

(% YoY)

Core CPI*

0.67

Source: Central Statistics Office (CSO), MOFSL

Exhibit 3: Core CPI falls to record low rate in Oct’19…

7

6

5

4

3

2

2.6

3.3

Core CPI*

CPI excl Food

Exhibit 4: …and core services also fell during the month

10

8

6

4

2

0

Oct-17

Apr-18

Oct-18

Apr-19

Oct-19

4.8

4.6

3.9

Housing

(% YoY)

Core services

Goods

(% YoY)

* Excluding F&B and F&L

Source: Central Statistics Office (CSO), MOFSL

13 November 2019

2

Exhibit 5: CPI and key components (% YoY)

% YoY

Overall CPI

Food & beverages

Cereal & products

Pulses & products

Meat & fish

Milk & products

Fruits & vegetables

Pan, tobacco & intoxicants

Fuel & light

Housing

Clothing & footwear

Miscellaneous

Transport & communication

Core CPI#

FY17

4.5

4.4

4.2

9.3

5.6

4.1

(0.1)

6.8

3.3

5.2

5.0

4.5

3.0

4.7

FY18

3.6

2.2

3.5

(21.0)

3.2

4.1

5.5

6.9

5.8

6.5

4.7

3.7

2.7

4.5

FY19

3.4

0.7

2.1

(8.3)

4.0

1.8

(2.8)

6.2

5.7

6.7

4.1

5.9

5.2

5.8

Oct-18

3.4

(0.2)

2.6

(10.4)

3.2

0.9

(5.6)

6.1

8.5

6.6

3.6

6.7

7.7

6.3

Aug-19

3.3

2.9

1.3

6.9

8.5

1.5

4.5

5.0

(1.7)

4.8

1.2

4.7

1.2

4.3

Sep-19

4.0

4.7

1.7

8.4

10.3

1.7

10.8

4.6

(2.2)

4.7

1.0

4.5

0.1

4.2

Oct-19

4.6

6.9

2.2

11.7

9.7

3.1

19.2

3.9

(2.0)

4.6

1.6

3.4

(0.5)

3.3

# Excluding F&B and F&L; Source: CSO, MOFSL

13 November 2019

3

NOTES

13 November 2019

4

Explanation of Investment Rating

Investment Rating

BUY

SELL

NEUTRAL

UNDER REVIEW

NOT RATED

*In

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days take appropriate measures to make the recommendation consistent with the investment rating legend.

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5

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13 November 2019

6