CPI inflation remained above the upper tolerance level of the RBI in Feb, with headline inflation at 6.09% (6.01% in Jan’22). The price momentum has turned positive again, led by non-food categories (energy and core), while, on net, food contracted sequentially, with mixed trends seen in perishables, protein goods and other staples. Mandi prices suggest that the fall in vegetable prices has slowed further, while edible oils should see pressure ahead. Core inflation eased to 6.05% from 6.20% even as the MoM momentum picked up pace, led by personal care and housing. We expect CPI inflation to remain above 6% in the near term, and currently see Mar’22 inflation at ~6.3%, assuming overdue increases in pump prices by 5%MoM and a milder correction in vegetable mandi prices. While the energy shock uncertainty persists, historically we have seen that the pass-through of global oil prices is partial, with fiscal/OMCs bearing part of the burden. Assuming Brent averages $100/bbl vs. our initial expectation of $85/bbl for FY23, the direct inflation impact with full pass-through could be more than 55bps, while the indirect hit of another 35-40bps could come with a lag amid sustained price pressures. We see CPI inflation averaging above 5.6% with an upside bias. We remain watchful of inflation push-and-pull factors and their impact on MPC’s reaction function, which we think will be in a wait-and-watch mode until H1FY23.

CPI inflation hits an 8-month high

CPI inflation expectedly remained sticky, crossing the upper tolerance limit of the RBI, printing 6.07% (Emkay 5.91%, Consensus 6%, 6.01% prior), with core inflation easing on an annualized basis due to the base effect. While food inflation rose 5.9% yoy (5.4% prior), sequentially it fell for the third-consecutive month, with mixed trends seen in perishables, protein goods and other staples. Vegetable prices fell mildly, while animal proteins showed divergent trends. Mandi prices suggest that the fall in vegetable prices has slowed further, while edible oils should see pressure ahead, after having eased earlier amid duty cuts. Separately, energy inflation was up by 0.9% MoM, even as the base effect helped it moderate to 8.7%yoy.

Core inflation eases even as sequential momentum picks up pace.

 Core inflation (ex-food, fuel and intoxicants) moderated further to 6.05% (6.2% prior). Feb’22 witnessed a sharp sequential gain in personal care, driven by gold, while the sequential gain in education doubled (0.4%) and housing prices momentum sustained (0.6%). While gains in T&C moderated (0.26%), the anticipated fuel price hikes are expected to put pressure ahead here. We see core inflation of 6.5% at FY22-end (average 6.07%), while it could cross 5.5% in FY23E.

WPI inflation surges, led by energy inflation

WPI inflation surged 13.1% in Feb’22 (Emkay 12.2%, Consensus 12.1%) and continued to print in double-digits for 11 straight months, with a sharp sequential surge, led by fuel & energy. Food prices turned the negative tide and posted mild sequential gains, even as retail food prices continued to contract. Core WPI rose 12.7% vs. 11.7% in Jan’22, with a sequential uptick of 1.4%. Higher crude prices led to elevated fuel price levels, up by 4.4% MoM. With a relatively cleaner pass-through of energy inflation in WPI, the coming prints will see upside pressure sustain. Our estimates suggest that a USD15/bbl increase in crude leads to an uptick of 185bps in WPI inflation on an annualized basis.

FY23 CPI to average 5.6%+; RBI likely in a “wait-and-watch” mode.

We expect CPI inflation to remain above 6% in the near term and currently see Mar’22 inflation at ~6.3%, assuming overdue increases in pump prices by 5% MoM and a milder correction in vegetable mandi prices. Assuming Brent averages $100/bbl vs. our initial expectation of $85/bbl for FY23, the direct impact with full pass-through could be more than 55bps, while the indirect hit of another 35-40bps could come with a lag amid sustained price pressures. Even with a partial passthrough amid the shock-absorbing nature of Governments fiscal and OMCs, we see CPI inflation averaging above 5.6% with an upside bias. We are also keeping an eye on food inflation, which could see production/input cost increases (fertilizers) and also edible oil increases due to the global shock. We remain watchful of inflation push-and-pull factors and their impact on the MPC’s reaction function, which we think will be in a wait-and-watch mode until H1FY23, assuming the exchange rate bears the sticky monetary policy smoothly.

Industrial production up 1.3%, decline continues in capex and consumer goods

IIP grew 1.3% in Jan’22 (Consensus: 1.4%) vs. an upwardly revised 0.7% growth in Dec’21. It is pertinent to note that the output is up by a meagre 0.7% from the pre-pandemic levels. Sequentially, the headline index remained flat with a mixed performance on a sectoral level. Although Jan witnessed limited mobility restrictions, it was not reflected in manufacturing output (1.1% YoY, contracted 0.9% MoM). Within manufacturing, weakness was seen in segments like Electrical Equipment (-11.2% MoM), Pharma (-7.2% MoM) and Food products (-3.7% MoM). Mining and Electricity grew 2.8% and 0.9% YoY, respectively. Within use-based sectors, contraction continued in Capital goods (1.4% YoY) and Consumer durables (3.3% YoY), while growth was seen in Infra (5.4%), consumer Non-durables (2.1%), Primary Goods (1.6%) and 0.9% in intermediate goods. A sequential decline was seen in Consumer durables, Non-durables and Capital goods.