Economy: Benign inflation, robust production - Kotak

Benign inflation, robust production. Lower CPI and WPI inflations (base 2011-12) were largely attributable to the favorable base effect. Core CPI inflation also inched lower to 4.4% from 4.84%. While we expect around 50 bps of downside to RBI's March 2018 estimate of 5%, the headline inflation is likely to still remain higher than the medium-term target of 4%. Meanwhile, the IIP (base 2011-12) for March surged 2.7%. We expect RBI to remain in a wait-and-watch mode in FY2018.

CPI inflation slips lower; core inflation at a 10-month low

CPI inflation slipped to a record low of 2.99% in April compared to 3.89% in March (Kotak: 3.07%, consensus: 3.45%), led largely by favorable base effect and slower pace in core inflation. Food inflation slipped to 0.6% compared to 2% in March. On a sequential basis, the food index moved up 0.2% mom primarily led by vegetables (2.4%) and fruits (1.2%). Meanwhile, price of pulses continued to contract sequentially, although at a slower pace ((-) 2.2% compared to (-) 5.5% in March). While the high frequency data for mandi prices are indicating pickup in fruits, vegetables and sugar prices, the pace remains contained. Meanwhile, fuel and light inflation continued its uptrend surging to a 3-year high of 6.1% led by 0.3% mom increase in fuel prices. Encouragingly, core inflation inched lower to 4.43% from 4.84% in March; printing a slower sequential increase (0.2% mom compared to 0.3% in March).

WPI inflation revamped to 2011-12 base; consistently lower than the old series

Newly released WPI inflation with 2011-12 inched sharply lower to 3.9% in April from 5.3% in March. The fall was largely led by favorable base effect. On a sequential basis, WPI inflation registered (-) 0.2%mom growth as compared to the historical 4-year average of 0.4% seen in April, led by (-)1.9% mom decline in fuel inflation. Notably, the new WPI inflation series is consistently lower than the older series, with all sub-categories mirroring similar patterns. However, only in February and March, the fuel inflation has risen higher than the old series.

Industrial production surges; sees broad-based improvement

The new IIP series (base 2011-12) recorded a higher-than-expected growth of 2.7% in March compared to 1.9% in February and market expectation of 1.9%. Sector-wise, mining surged 9.7% from 4.6% in February and electricity growth increased to 6.2%. Under the use-based category, production of primary good largely comprising minerals surged 17% yoy. Capital goods also registered the first positive reading in five months (30.5%). The production of consumer non-durable good, bellwether of rural demand, continued its uptrend (19.5%), and durable goods production registered the first positive reading in five months. The new category of infrastructure and construction goods also picked up sharply by 13% from (-)8.7% in February.

RBI to stay on a wait-and-watch mode

In its April policy, RBI maintained its hawkish stance on inflation and scaled up its inflation trajectory by an average of 25 bps. The minutes of the meeting also reiterated the concerns on upside risk due to sticky core inflation, possible mean reversion of food inflation and second round impact of 7CPC HRA increases. Recent slide in core inflation (52 bps fall since January) and the ebbing of global reflationary risks lately should provide some relief to the hawkish-turned MPC members. We expect the headline inflation to hover around 4.5% by March 2018 (ex-HRA), around 50 bps lower than RBI's estimates. Nonetheless, we expect a status quo in FY2018 as RBI aims for the 4% target.

Source : Equity Bulls

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