India Macro Update

Inflation: Our core thesis and “out of consensus” call seems to be playing out …

February 26, 2023

 CPI inflation back above 6% target
The dark clouds are back … CPI inflation increases to 6.52% y/y in January 2023
 After a brief respite in November 2022 and December 2022, CPI inflation is back above 6% target
 RBI’s hawkish stance (in line with our “out of consensus” call) in the last MPC now seems vindicated!
 Strengthens expectation of another 25bps hike in the April MPC meeting
 Our contrarian call is that there will be one more hike of 25bps after the April MPC meeting

10

Inflation Rate (%) Annual Inflation Target (% YoY)

9
Lower bound inflation target (% YoY) Upper bound inflation target (% YoY)

0
Oct/19

Oct/20

Oct/21

Oct/22
Jan/19

Jan/20

Jan/21

Jan/22

Jan/23
Apr/19

Apr/20

Apr/21

Apr/22
Jul/19

Jul/20

Jul/21

2 Jul/22
 Food and Beverage inflation returns to ‘normal range’
Our core thesis is broadly playing out
 In October 2022, I had co-authored a publication, highlighting that street / consensus / the ”Doves” were
under-estimating the impact of food inflation on India’s CPI
 My out of consensus call was a terminal rate closer to 7% with 2 hikes in CY2023. It sounded ludicrous then,
but we may be moving closer to that reality now!
 It now seems that November 2022 and December 2022 was an exception and contribution of food and
beverages inflation returns to ‘normal range’ of c.45%-50% (See graph below)

60%

51% 52%
49% 50% 50%
50% 48% 48%
45% 46%
43% 44%
40%
40% 37%

30%

20%

10%

0%
Jan 22 Feb 22 Mar 22 Apr 22 May 22 Jun 22 Jul 22 Aug 22 Sep 22 Oct 22 Nov 22 Dec 22 Jan 23
Index Index Index Index Index Index Index Index Index Index Index Index Index

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 Is it a “Cereal Killer” or is it “too spicy to handle”?
Contribution of Cereals, Spices and Eggs is up c.300% in the past year
 In the past one year, contribution of 5 items has more than nearly doubled
 Apart from cereals, contribution of Spices, Eggs, Personal care, Milk and Education items are up 75%-350%
 Keep a close watch on Housing: it accounts for 10.07% weight in CPI and its contribution is on an uptrend

400% 366%350%
294%
300%

200% 174%
115%
75%
100% 42% 31% 29% 25% 22%
16% 11% 10% 2% 1%
0%
-7% -27%
-100% -35% -51%
-83% -92%
-200%

-300%
-328%
-400% Prepared meals, snacks, sweets etc.
Milk and products

Fuel and light

Health

Recreation and amusement

Footwear

Sugar and Confectionery

Cereals and products

Personal care and effects

Housing

Household goods and services

Meat and fish
Spices

Oils and fats

Egg

Education

Pulses and products

Clothing

Non-alcoholic beverages
Fruits

Vegetables
Pan, tobacco and intoxicants

Transport and communication

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 CPI internals reveals a disturbing trend – ‘persistence’
Cross-sectional analysis reveals 10 out of 22 items contributed in excess of 40bps each
 Apart from cereals, milk, spices, prepared meals, fuel, clothing and housing are the biggest culprits
 Our worry is that inflation becomes “entrenched” and “persistent”. Early signs are ominous!
 Under-appreciated risk is that baton may soon shift from Supply-push inflation to Demand-pull inflation
-1.00 -0.50 0.00 0.50 1.00 1.50 2.00

Cereals and Products 1.56

Milk and products 0.58
Spices 0.53
Prepared meals, snacks, sweets etc. 0.43
Food and Beverages

Meat and Fish 0.22

Fruits 0.08
Pulses and Products 0.10
Non-alcoholic Beverages 0.05
Egg 0.04
Sugar and Confectionery 0.01
Oils and fats 0.05
Vegetables -0.71
Fuel and light 0.74
"

Clothing and Footwear 0.59

"

Housing 0.47
"

Pan, tobacco and intoxicants 0.07

"

Transport and Communication 0.39

Health 0.37
Miscellaneous

Personal Care and Effects 0.37

Household Goods and Services 0.28
Education 0.26
Recreation and Amusement 0.09

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 We won’t be surprised if India 10Y touches 8%!
Will history repeat itself? We think so ...
 Street and consensus seems to be fixated on a range-bound market. I believe risks are skewed to the upside
 Indeed, inflation trajectory suggests that the sell off in India 10Y has further to go
 Historically, peaks of 10-year India Government Bond (IGB) yields have always ended above the
psychological 8% handle during global macro events (see graph below)

14
India Government Bond (IGB) 10Y Yield (%)

12

Peak 9,41%
10 Peak 9.24%
July 2008
August 2013
Peak 8.16%
September 2018 Peak 7.62%
8 June 2022

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 Thank you

Prashant Tandon
Chief Investment Officer (CIO)