By Sameer Narang
WPI inflation moderated to 12.1% in Jun’21 from 12.9% in May’21, led by lower food (6.7% in Jun’21 from 8.1% in May’21) and fuel inflation (32.8% in Jun’21 from 37.6% in May’21). On the other hand, manufactured product index rose from 10.8% in May’21 to 10.9% in Jun’21. A higher base along with steady to declining international oil and commodity prices imply WPI inflation has peaked and is likely to edge lower in the coming months. A below normal monsoon and higher oil prices remain risks to our view.
Food inflation eases: Food inflation moderated to a 3-month low of 6.7% in Jun’21 from 8.1% in May’21 led by drop in fruits and vegetables inflation to 2% in Jun’21 from 4.4% in May’21 and eggs to 29.7% in Jun’21 from 37.4% in May’21. Price increase in fruits dropped to a 5-month low of 5.6% in Jun’21 from 20.2% in May’21. Cereal prices declined by 2.7% in Jun’21 led by paddy (deflation of 2.4% in Jun’21). Pulses continue to see elevated increase at 11.5% in Jun’21. Prices of protein-based items such as egg, milk and fish too dropped to 8.6% in Jun’21 (10.7% in May’21). However, vegetable prices contracted at much slower pace of 0.8% in Jun’21 (-9% in May’21) driven by spike in onion prices (64.3% in Jun’21). A lower than normal monsoon and drop in sowing as of now is a key upside risk to food inflation.
Fuel and power inflation moderates: Fuel and power inflation eased to 32.8% in Jun’21 from 37.6% in May’21. Base effect played a role in this. Mineral oil index cooled off from 81.2% in May’21 to 61.8% in Jun’21. This is in line with trend in international oil prices. After reporting an increase of 111% in May’21, oil prices were up by 80% in Jun’21. The dip in mineral oils inflation was led by ATF (84% in Jun’21 versus 234% in May’21), Naphtha (87% versus 241%), Furnace oil (71% versus 141%), and LPG (31% versus 61%). Electricity index saw a 10% increase versus 5.8% in May’21. We expect fuel inflation to come down in the coming months on the back of base effect and steady international oil prices.
Core inflation hardens, but will soften: Core inflation rose to 10.4% in Jun’21 from 10% in May’21. Manufactured products inflation also picked up to 10.9% from 10.8% in May’21. Of the 22 commodity indices, as many as 14 indices rose at a faster pace in Jun’21 than May’21 led by furniture, textiles and basic metals. Notably, international commodity prices have fallen by 0.6% in Jul’21 over Jun’21 compared with 1.4% increase seen in Jun’21 over May’21. A higher base will also cool down the pace of core inflation. Manufactured products inflation averaged 0.6% in H1FY21 as against 4.9% in H2FY21.
Macro developments
S&P has reaffirmed India’s sovereign rating for 14th year in a row to ‘BBB-‘ with a stable outlook on the back of gradual recovery in the economy. The agency noted that India’s strong external settings is likely to help buffer the risks associated with the government’s high deficits and debt stock. It also expects the economy to normalise in the coming months with GDP growth at 9.5% in FY22.
US CPI rose the most since CY08 by 0.9% in Jun’21 (est.: 0.5%) and against 0.6% increase in May’21, on MoM basis. Food prices rose by 0.8% from 0.4% and energy prices which was flat in May’21 shot up by 1.5%. Core CPI (excl. food and energy) also rose by 0.9% from 0.7% in May’21, driven by sharp jump in new and used vehicle prices. On YoY basis, core rose by 4.5% while headline CPI was up by 5.4%.
CPI inflation in Germany eased to 2.3% in Jun’21 from 2.5% in May’21, led by dip in both energy prices (9.4% versus 10%) and food inflation (1.2% versus 1.5%). HICP CPI rose by 2.1% versus 2.4% in May’21. Separately, in France CPI rose by 1.5% in Jun’21 versus 1.4% in May’21. While both food and energy prices fell, core inflation (1.1% versus 0.9%) pushed the headline print up.
Markets
Bonds: Except US (higher) and Germany (stable), global yields closed lower amidst concerns regarding faster spread of Delta variant. US 10Y yield rose by 5bps (1.42%) as CPI data raised hopes of faster pace of tightening by Fed. Crude prices rose by 1.8% (US$ 76/bbl) on expectation of drop in US inventory. India’s 10Y yield fell by 2bps (6.2%) as CPI data lent some comfort.
Currency: Barring INR and CNY (higher), other global currencies closed lower. DXY rose by 0.5% in line with an increase in US 10Y yield as inflation rose more than expected in Jun’21. CNY rose by 0.1% as China’s exports strengthened in Jun’21. INR appreciated by 0.1%. It is however trading lower today, while other Asian currencies are trading mixed.
Equity: Global indices ended mixed as investors monitored higher than expected inflation print from US and corporate earnings. While European indices ended flat, Dow (0.3%) ended lower. On the other hand, Sensex (0.8%) ended in green led by strong gains in banking stocks. However, it is trading lower today in line with other Asian stocks.
