FREE

India Economy: IIP and CPI review - Growth inflation conundrum continues to intensify

Jan-20 CPI came in at 7.6%yoy (consensus expectations at 7.4%yoy) while IIP Dec-20 declined by -0.3%yoy (consensus expected 1.7%yoy growth). The inflation growth conundrum (hardening inflation against weak economic backdrop) continues to intensify and it was the primary cause behind MPC’s pause in Dec-19 policy meet. While some of the high frequency data points (tractor sales, GST collection, UV sales etc.) are exhibiting very early signs of recovery, sustainability of uptick and its breadth are yet to be ascertained. Going forward, as the government allowed FY20 fiscal deficit to slip to 3.8% of GDP while maintaining expenditure growth, we expect growth to mark a recovery by the start of FY21. However, we expect inflation concerns to continue to be primary driving force for MPC in terms of repo decisions, while maintaining accommodative stance (as growth remains weak). We also expect easy liquidity and already executed rate cut (135bp) transmission to continue to be primary focus areas for RBI, which are expected to keep G-sec yields rather soft at levels around 6.5% in near term. However, we expect hardening pressure on yields to return as fiscal concerns (led by ambitious telecom and disinvestment receipts target in FY21) take a front seat as FY21 progresses. We expect G-sec yields to settle at 6.75-7% by FY21 end.

Summary of data releases:

CPI at 68 months high at 7.6%yoy; Core inflation hardens on back of telecom tariff hikes and personal care items inflation

• CPI print for Jan-20 came in at 7.6%yoy, mildly higher than consensus expectations of 7.4%yoy.
• CPI hardened 24bpmom, led by fuel & light and miscellaneous series (impact of telecom tariff hike and personal care products). While recent drop in crude prices on coronavirus impact would have a downward impact on upcoming data headline inflation data points, impact of telecom tariff hikes is expected to be sticky.
• Food inflation though came off mildly on a mom basis, it remained high on absolute levels at 13.6%yoy. Apart from vegetables, this is led by protein items (eggs, fish, milk, meat) and pulses. Edible oil prices also saw significant hardening on a mom basis. While vegetable prices are relatively seasonal and have already started to come off, other set of prices tend to be sticky and would retain an upward momentum on food inflation in near term. UNFAO global food price index also continued to be high with 11.3%yoy growth in Jan-20, indicating a global strengthening pressure on food prices, thus pointing to some bit of imported inflation here as well.
• One silver lining here is sustained strength in rural food prices, which means a good a price recovery for farmers. This would mean well for rural consumption sentiment in near future.
• Core as well as super core inflation (super core inflation excludes retail fuel prices additionally) hardened by 35-38bpmom, primarily led by telecom tariff and personal care goods, hence it is expected to remain sticky. We expect core inflation to be sticky around 4%yoy in near term.

Dec-19 IIP declines -0.3%yoy – Barring primary and intermediary goods other segments remain weak

• Dec-19 IIP disappointed with a -0.3%yoy decline against consensus expectations of 1.7%yoy growth. Core industries, which comprises about 40% of the weight within IIP, grew by 1.3%yoy during the same month.
• The contradictory move in these two series is because primary activities like mining have held up well, while value added output like capital goods, consumer goods have been weak.
• Dec-19 contraction comes against 1.8%yoy expansion seen in Nov-19 and the movement is partly contributed to by base effect (Nov-18 growth stood at 0.2%yoy against Dec-18 growth at 2.5%yoy). Other major reasons weakness here continues to be weak economic backdrop
• On economic activity side – Mining output improved partly aided by base effect, while manufacturing output saw a decline of 1.2%yoy. Electricity output declined very marginally by -0.1%yoy, which is significantly better than -5%yoy decline last month.

·      On usage side – While primary and intermediate goods output grew, all other categories saw decline. While capital goods output declined by 18%yoy, consumer durables declined 6.7%yoy. Consumer non-durables output decline was at 53 months low at -3.7%yoy.