June CPI, May IP each fall…

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We forecast GDP to development 8% in FY22, decrease than consensus expectations of 9.3%.

By Pranjul Bhandari & Aayushi Chaudhary

CPI inflation for June was near our expectation (precise: 6.3% y-o-y, HSBC: 6.4%, BBG: 6.6%,). While the headline print was unchanged (additionally 6.3% in May), the sequential momentum dropped following a nasty spike final month. The fall was throughout the board, however starkest for core inflation (0% month-on-month sa, versus a 1.8% rise final month).
In phrases of particulars, the momentum in core gadgets corresponding to recreation, private care and home items dropped, possible led by a pay-back after final month’s spike, in addition to the mending of provide chains as native lockdowns had been step by step rolled again.

Having stated that, regardless of falling, the quarterly momentum in well being and transport prices remained elevated. The former possible reflecting pandemic-led stresses and the latter reflecting increased oil costs. Despite the autumn, core inflation stays elevated at 5.8% y-o-y, and is prone to stay within the 5.5% ballpark for the remainder of the 12 months.

On the meals entrance, regardless of the month-to-month sequential fall, the quarterly momentum remained elevated (7.9% quarter-on-quarter, sa, ann). Oils, sugar and ready meals had been most inflationary, at the same time as the worth momentum for cereals, pulses and milk got here in softer, and even fell for costly gadgets like vegetable, fruits, egg, meat and fish. The meals inflation outlook will rely loads on monsoon rains. Reservoir ranges, a key driver of meals costs, are a shade decrease than final 12 months, and July rains will likely be necessary to fill them up. So far the primary week of the month has witnessed weak rains, however the climate division forecasts a decide up over the following few weeks.

We forecast CPI inflation at 5.4% in FY22. The drivers of inflation will possible change, from logistical disruptions in 1H to price push and companies demand led inflation in 2H. Even as headline inflation falls over the following few months, pushed by base results, the headline print is prone to stay increased than the 4% goal by way of the 12 months. We count on the RBI to embark on a gradual normalisation path beginning 4Q2021.

May’s Index of Industrial Production contracted sharply (by 10.9% month-on-month) after 5 months of enlargement. Recall second wave peaked and lockdowns intensified in May. Even because the IP index got here in 8% under the pre-pandemic ranges (the seasonally adjusted index stage in January 2020), the autumn was c4 instances decrease than the autumn throughout the first wave.

Production of shopper items fell for the second consecutive month pushed by contraction in each sturdy and non-durable items. Durable items manufacturing, a proxy for city demand, got here in 28% under pre-pandemic ranges whereas non-durable good manufacturing, a proxy for rural demand, got here in 7% under. This, we predict, is a consequence of the second wave impacting city prosperous households extra this time round. Capital items manufacturing dipped to 23% under pre-pandemic ranges, from simply 5% under it final month. Surprisingly, ‘infrastructure and construction goods’ index continued to tread 3% above the pre-pandemic ranges (although contracted month-on-month).

We count on GDP development to maneuver from an uncertainty-led contraction in 1H to a vaccination-led enlargement in 2HFY22. Urban customers could demand extra companies over the following few months, whereas rural customers concentrate on items. We forecast GDP to development 8% in FY22, decrease than consensus expectations of 9.3%.

With Priya Mehrishi, economics affiliate

Edited excerpts from HSBC
Global Research’s Data Reaction
report dated July 12

Bhandari is chief India economist & Chaudhary is economist, HSBC Securities and Capital Markets (India) Pvt Ltd

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