"Driven by food and miscellaneous items, the CPI inflation dipped to 6.7% in July 2022, broadly in line with our expectation (6.6%), offering relief after the successive prints above 7% in Q1 FY2023. While the inflation for housing and pan, tobacco and intoxicants remained stable at a low level, that for fuel and light, and clothing and footwear rose further from already elevated levels, moderating the comfort provided by the drop in the headline print.
In month-on-month terms, the food and beverages index rose by a marginal 0.1%, benefitting from the sharp correction in edible oils, and meat and fish, along with a slight drop in vegetables. However, the indices for fruit, eggs and cereals recorded substantial up-moves, with the global supply issues for wheat and the double-digit YoY lag in domestic sowing of rice posing material risks.
Given the base effects, we caution that the next two CPI inflation prints could rise slightly from the 6.7% seen in July 2022, in spite of which we believe that the average inflation for the ongoing quarter will modestly trail the MPC's projection of 7.1%.
Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June 2022, which bodes well for easing domestic input cost pressures and the core-CPI inflation in the next few months. In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket (services: +23.4%), and hence, remains a key monitorable, along with the significant lag in kharif sowing of rice.
Given the MPC's focus on anchoring inflation expectations and the Governor's statement on inflation moving closer to the target of 4.0% over the medium term, we expect another rate hike of ~10-35 bps in the September 2022 policy meeting. Thereafter, we believe the MPC is likely to be extremely data dependent. If the downtrend in commodity prices sustains, we expect the first sub-6% print to emerge by the middle of Q3 FY2023, which may prompt a pause to reassess the robustness of growth."
"As anticipated, the normalising base resulted in a fairly broad-based dampening of the IIP growth to 12.3% in June 2022, although this was appreciably higher than our forecast of 10.2% led by the manufacturing sector. Given the moderation in the YoY performance recorded by most high frequency indicators in July 2022, such as electricity generation, non-oil exports etc., we expect the IIP growth to ease to high single digits in that month."