Nirmal Bang: Data Preview - August CPI Inflation; July IIP; Q1 FY21 Current Account Balance
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Nirmal Bang Report
Consumer Price Index or CPI inflation for August 2020 is likely to remain elevated at 6.80%, but will reverse trajectory and come in slightly lower compared to 6.93% in July 2020.
Food and beverage inflation is likely to come in at about 8.62% in August 2020, a tad lower from 8.71% in the previous month. Although food prices have not come off, inflationary pressures have eased.
Vegetable prices are likely to have risen in the range of 3.5-4% month on month compared to a 14% MoM increase seen previously.
Core CPI may ease slightly to 5.55% in August 2020 from 5.87% in the previous month on lower diesel prices, as some states, particularly Delhi, cut taxes on diesel.
Gold prices have been flat over the month, which should also ease the pressure on core inflation.
The pressure on fuel and light inflation is also likely to be muted as LPG prices have been flat.
We continue to expect CPI inflation to ease to around 4% levels by December 2020, which should open up room for rate cuts of up to 50 basis points.
Wholesale Price Index or WPI inflation is likely to ease to -0.50% in August 2020 after a 0.58% decline in the previous month. WPI food articles inflation is likely to ease to 2.93% from 4.1% in the previous month.
However, core WPI inflation may see a slight uptick, declining by 0.57% compared to a 0.97% decline in the previous month.
The index of industrial production (IIP) may decline by 12.1% YoY in July 2020 after a 16.6% decline in June 2020. Although the economic recovery continues, the pace of recovery has slowed.
As a case in point, the Markit Manufacturing PMI slowed to 46 in July 2020 from 47.2 in June. Core infrastructure industries output declined by 9.6% YoY in July 2020 compared to a 13% decline in June.
The current account is likely to be in surplus for the second straight quarter on a substantially lower trade deficit and a relatively resilient services sector balance, which can primarily be attributed to the IT sector.
We are factoring in a current account surplus of 19.5 billion U.S. dollar or 3% of gross domestic product in Q1 FY21, up from 0.6 billion U.S. or 0.1% of GDP in Q4 FY20.
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