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ICICIdirect Research Posted on 05:23pm 16-Sep-2020

Monthly Inflation: Inflation remains sticky but outlook favourable...

CPI Inflation (August) ...... 6.69% YoY

• CPI inflation for August 2020 was marginally lower at 6.6% from the revised July 2020 figure of 6.63% (earlier projected at 6.93%). Average retail inflation in Q2FY21, H1FY21 so far is at 6.7%, 6.6% respectively

• The combined food price inflation (CFPI) for August was at 9.05% against 9.27% in July, primarily driven lower by cereals and products while vegetables inflation at 11.4% remained high. Transport & communication and personal care & effects inflation remained high due to higher retail fuel prices and higher gold prices

• Overall, the base effect of headline CPI index and, in particular, many food items is turning favourable from September onwards. The base effect is favourable particularly for items like vegetables, pulses, milk & products and oil & fats. Inflation for items like cereals and products, meat & fish seems to have topped out and would ease, going forward, as the economy opens up easing supply side pressures. Therefore, H2FY21 CPI inflation is likely to fall sharply

• Overall, weak economic growth continues to take precedence over disruption driven short-term inflation data. Better prospects for Kharif sowing season, favourable base effect and weak structural demand due to economic slowdown augur well for the inflation outlook for H2FY21. RBI may want to look through the current abnormal data print and continue to focus on growth by adopting accommodating liquidity stance even though may not cut benchmark rate immediately

• From a debt market perspective, with the banking system liquidity continuing to remain in surplus, short-term rates are likely to remain low for longer. The G-sec supply overhang from both the central and the state governments remains and is likely to keep the yield curve steep. Overall yield levels across the curve are likely to remain stable at current levels with news flow on RBI intervention through OMOs and the government’s second half borrowing determining the overall trend. FPI inflows, going forward, given further decline in global bonds yields may also have a bearing on the Indian markets

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