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MOSL: ECOSCOPE: CPI inflation cools off more than expected in Aug’21; Policy interest rates to remain unchanged in FY22

ECOSCOPE: CPI inflation cools off more than expected in Aug’21; Policy interest rates to remain unchanged in FY22

 

• The headline Consumer Price Index (CPI) eased to four-month lows of 5.3% YoY in Aug’21, far below the Bloomberg consensus and our expectation of 5.6% (similar to that in Jul’21). In the first five months of FY22, headline inflation averaged 5.5% – v/s 6.6% in the corresponding period last year and an average of 4% in the corresponding period in the previous five years.
• Almost the entire deceleration in headline inflation was on account of ‘vegetables’, which witnessed deflation of 11.7% YoY last month. Consequently, food inflation also came in at four-month lows of 3.1% YoY, compared with 3.9% in Jul’21 and our expectation of 3.8%. Some other components in the food basket, such as ‘pulses & products’, ‘eggs’, ‘meat & fish’, and ‘fruits’ saw lower prices MoM, while prices of ‘cereals & products’, ‘oil & fats’, ‘milk & products’, and ‘spice’ increased on a monthly basis in Aug’21.
• Excluding food & beverages (F&B); pan, tobacco & intoxicants (PT&I); and fuel & light (F&L), core inflation further eased moderately to 5.9% YoY last month (from 6% YoY in Jul’21). Within the core components, inflation in ‘personal care & effects’ eased to six-year lows of 1% YoY in Aug’21.
• Overall, we continue to believe headline inflation would ease further towards 4.2–4.3% over Oct–Nov’21, before rising to 5.5% once again in 4QFY22. We would not be surprised if the long-pending reduction in retail fuel taxes is announced around Diwali in early Nov’21. If so, this may further help keep headline inflation marginally lower than otherwise.