India June 2019 CPI Analysis - Core Inflation moderates

CPI marginally increased to 3.2% YoY in Jun’19 from 3.1% in May’19, in line with street estimates. Headline inflation continues to remain at lower than the target range of 4% (+/-2%) as mandated by RBI.
Food inflation rose by 2.4% in Jun’19 from 2% in May’19 on the back of higher prices of meat and fish as well as the pulses. Vegetables and pulses prices in urban areas continued to remain expensive. The prices of pulses moved higher in the rural areas on account of higher MSPs. We expect the food prices should continue to remain elevated on account of lower base. 
  1. Fuel and light inflation declined to 2.3% in Jun’19 vs. 2.5% in May’19. Crude prices cooled off on account of global growth concerns but we expect the prices to be higher on the back of excise duty hike announced during the Union Budget 2019.
  2. Clothing and Footwear inflation declined to 1.5% in Jun’19 from 1.8% in May’19. However, we envisage the prices to remain at the current levels given soft demand and slowdown in the economy. 
  3. Housing inflation remained flat at 4.8% in Jun’19, which we expect to remain at current levels in the short term as well. However, on account of the budgetary measures to promote affordable housing, we expect the inflation to increase in the long term. 
  4. Transport and communication inflation declined sharply to 0.7% in Jun’19 from 1.6% in May’19. Transport cost has been coming down on account of cost efficiency post GST roll-out. Looking ahead, we expect it to remain moderated on account of slowdown in the economy.
  5. Core inflation also declined to 4.1% in Jun’19 from 4.2% in May’19. Core inflation has started to moderate and we feel it will continue to moderate until 1HFY20 owing to muted demand. We feel the core inflation will converge with headline inflation at sub-4% level after the RBI cited even more subdued inflation expectations.
The RBI in its recent monetary policy meeting changed stance from “neutral” to “accommodative” and cut the key rates by 25bps after the two cuts in Feb and April 2019. It is expected that RBI will consider cutting rates by another 25bps in August MPC meeting bringing the real rates of interest down and to help reduce the cost of funds or borrowers. With Fed also posting dovish outlook earlier in the month, RBI may not have to worry the maintenance of yield spreads!

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