State Bank of India: Ecowrap: CPI inflation continues its downward trend

Highlights from the report:

CPI inflation moderated to almost 25-months low to 4.25% (SBI estimate: 4.20%) in May’23 as compared to 4.70% in Apr’23, broadly on expected lines driven by base effect. Core CPI although increased marginally to 5.15% in May as compared to 5.12% in Apr, but is still below the one-year average of 5.9%.

The retail inflation remained within the tolerance range of the RBI for the third consecutive month. Nevertheless, continued vigil on the evolving inflation outlook is warranted, especially as the monsoon outlook and the impact of El Nino remains uncertain.

Item wise weighted contribution showed that the 45 bps decline in CPI inflation in May’23 when compared to Apr’23 is attributed majorly to tomato, whose weighted contribution has reduced by 36 bps. Overall, 9 out of top 10 items witnessing decline in weighted contribution in headline inflation are in food and fuel, while one item is under transport and communication.

As per IMDs long range forecast released in May, Southwest monsoon seasonal (June to September) rainfall over the country as a whole is most likely to be normal (96 to 104% of Long Period Average (LPA)). The long-term trends in NOAAs Multi[1]variate ENSO Index Version 2 shows that ENSO has moved in positive indicating onset of El Niño conditions over the equatorial Pacific Ocean. The Indian Ocean Dipole trends as per NASA IOD index continues to be neutral. Combining the two phenomena, monsoon is expected to be normal.

Keeping all factors into account, we expect, in FY24 average CPI will be 4.9% compared to 6.7% in FY23.

The concurrently released IIP data shows that IIP rose 4.2% yoy in Apr’23 after dipping to 5-months low of 1.7% in Mar’23. While mining increased by 5.1%, manufacturing grew by 4.9%, electricity continued to contract at 1.1%.

Using the AI/ML model the four mutually exclusive scenarios of repo rates constructed by training the data of RBI rate deciding manner for the period of Feb’22 to Nov’22 shows that the current rate of 6.5% is already higher than the required rate of 6.23% (highest among 4 cases).

We expect one more pause by RBI MPC meeting in August 23, while carefully watching the CPI and Core CPI number in on[1]going months. While we rule out a rate cut any time soon, we pencil in the first rate cut by RBI in Q4 FY24. The magnitude could be larger than 25 bps.

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