June headline CPI inflation remained steady at 6.26%, led by an unfavorable base effect, but with easing sequential momentum in both headline and core, Emkay Global has said in a report.
"We slightly trim our FY22 inflation forecast to 5.3% from 5.45% (6.2% in FY21). Even assuming food inflation averaging around reasonable levels, core inflation should average a tad lower than 6%, outdoing headline inflation. We remain watchful of the pass-through of impending cost push pressures in core goods inflation, while the re-opening-led ensuing demand revival in select contact-sensitive household services could pressurize core services inflation ahead.
However, the MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable, the brokerage said in a report.
According to Emkay Global Energy inflation depicted the pass-through of global oil prices. "Core inflation eased to 6.2% and fell sequentially across most sub-categories, led by health and personal care. Separately, IIP surged 29.3% in May amid a distorted base. Sequentially, activity softened across sectors. Current levels are still below May'19 levels," it said.
CPI inflation eases but breaches RBI's tolerance band with a broad-based increase
June inflation pleasantly surprised by printing 6.26% (Emkay: 6.67%, Consensus: 6.6%) - a tad lower than the unexpected surge in May to 6.3%. Nonetheless, it remains above the RBI's upper tolerance band of 6%. While the low-base effect of last year continues to weigh on the annualized print, the sequential momentum has ebbed across food and non-food categories, specifically core services.
IIP rises 29.3% in May led by base effect even as it weakens sequentially
The 29.3% surge in May IIP (Emkay: 30.5%, Consensus: 32.0%) was propelled by a favorable base, which will continue to distort the annualized figure in Q1FY22. Sequentially, activity softened across sectors and current levels are still trailing below May 2019 levels. Sector-wise, manufacturing rose 34.5% YoY, led by motor vehicles and other transport equipment, tobacco and textile products.