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MOSL: ECOSCOPE-CPI inflation inches up in May’19, IIP surprises positively; Rate cut in August on the cards

ECOSCOPE: CPI inflation inches up in May’19, IIP surprises positively; Rate cut in August on the cards

 CPI-based retail inflation inched up marginally to a seven-month high of 3.05% in May'19 from 2.99% a month ago. The number was in line with consensus, and marginally higher than our forecast of 2.9%.

• Higher headline inflation can primarily be attributed to food inflation, which rose to an 11-month high of 1.9% in May'19 due to an uptick in inflation in 'vegetables' from 2.9% in Apr'19 to 5.5% last month.
• Core inflation (all items excluding 'food & beverages', 'pan, tobacco & intoxicants' and 'fuel & light') eased to 4.2% YoY in May'19, the lowest level in 22 months.
• Inflation in 'core services,' however, decelerated to a 10-month low of 5.6% in May'19 from 5.9% a month ago, supported by a decline in inflation across its sub-categories.
• Growth in Index of Industrial Production (IIP) inched up to a six-month high of 3.4% in Apr'19 v/s 0.4% a month ago and 4.5% in Apr'18 (Exhibit 6). The IIP growth number is lower than both our forecast and consensus of 1.6% and 0.6%, respectively. The rise was largely broad-based with the push coming from all the three categories-manufacturing, mining and electricity.
• Lower level of retail inflation and subdued GDP growth raise the possibility of a 25bp rate cut in the RBI's August monetary policy meeting, in our view. We expect inflation to cross 4% in Oct'19 and average 4.1% in FY20, and IIP to average 3.7% in FY20, similar to that in FY19.