Macroeconomic Update: CPI, WPI and IIP

Size: px

Start display at page:

Download "Macroeconomic Update: CPI, WPI and IIP"

Kristian Simon
5 years ago
Views:

1 Macroeconomic Update: CPI, WPI and IIP India s retail inflation for the month of July rose from a record-low to a three-month high of 2.36% on account of an uptick in prices of food items including vegetables and also increase in the housing component. June headline inflation reading was revised lower to 1.46% from 1.54% estimated earlier. Core CPI that excludes costs of food and energy rose to 3.96% in July from 3.85% a month prior. On an annualized basis, the food items basket rose to its highest level in the current fiscal year. However, on a monthly basis the food and beverages component jumped to highest level since July 2014 as costs of fruits and vegetables, especially tomatoes escalated. The Housing component too contributed to the rise in the overall index, rising 4.98% in July on a year-on-year basis. On a sequential basis, the index rose 0.99%, its highest level since Aug 2013, incorporating the first-order effects of increased HRA under the 7 th CPC recommendations. As per our expectations, inflation based on the wholesale price index came in at 1.88% as compared to 0.90% in the previous month primarily led by a sharp increase in the prices of vegetables such as potato and tomato. Also, WPI for the month of May was revised upwards to 2.26% compared to 2.18% earlier. Inflation in Primary Articles rose by 4.33% in July compared to 0.24% in June, the highest increase registered in the series. The vegetable index alone saw a sequential increase of 48.75% compared to 9.98% observed in the previous month. Prices of pulses and fuel, however, continued to decelerate to -2.98% and -1.45%, respectively Meanwhile, India s factory output contracted 0.1% in June (1.8% in May) to its lowest level in four-years from 8% a year ago as manufacturing activity took a beating on uncertainty prior to the GST roll out. On a quarterly basis, factory output growth during April-June slowed down to 2% from 7.1% in the corresponding period last year. Manufacturing output contracted 0.4% in June from a growth of 1.2% in May and 7.5% in the same period a year ago. Going ahead, we believe the sharp uptick in food items, especially vegetables like tomato, onions and potato will moderate in the coming months and could keep headline inflation anchored below 3% for the next reading. Further, industrial activity too may see a reversal from the de-growth seen in June, albeit continuing to remain at comparatively low levels as manufacturers rebuild inventory as the new tax regime falls into place. These figures are likely to dampen expectations of a near-term rate cut by the RBI. However, we still believe headline inflation may undershoot the full-year target of 4%, opening up room for a rate cut in Q4FY18 1

2 India June CPI off record low as costs of food, housing soar Sonali Vahadane India s retail inflation for the month of July bounced off a record low level of 1.46% in sonali@stcipd.com June as prices of food items; mainly vegetables saw a sharp rise. The housing component too accelerated on a sequential basis that contributed to the rise in overall headline reading reflecting the impact of HRA under the 7 th CPC recommendations. Ria Modh ria@stcipd.com On an annualized basis, vegetable prices continued to move in the negative territory for the 11 th straight month, although at a slower pace. The sequential trend however paints a more accurate picture of the uptick in prices seen last month. Retail prices of tomatoes rose 137% in July, followed by Potato (7%) and Onion (5%). Costs of tomatoes spiked as excess rainfall in high-producing areas damaged the produce. Similarly, housing costs rose 0.99% on a sequential basis, its fastest pace of growth since Aug This compares to a contraction of 0.53% in June. This uptick was mainly driven by first-order effects of higher HRA payouts for Central government employees under 7 th CPC. 2

3 Adding to this, energy prices too accelerated to 4.86% in July from 4.46% a month prior. On a monthly basis, the component witnessed an uptick of 0.47% from a decline of 0.46% in June and 0.08% a year ago. Rise in vegetable index aids uptick in WPI inflation Showing an upward movement after a two-month decline, the WPI index rose to 1.88% as compared to 0.90% in the month of June. While seasonality indicates a rise in food inflation, an unprecedented rise in the prices of tomato and potato caused the vegetable index to rise by 48.75%. While manufactured products also registered a sequential increase of 0.18%, fuel prices decelerated by -1.45%, continuing a disinflationary trend. The elevated WPI reading falls exactly in line with our estimate of 1.88%, though much higher than consensus expectations of a 1.3% rise. Along with this release, WPI for May- 17 was also revised upwards from 2.18% to 2.26%. 3

4 At a sub-component level, inflation in Primary Articles rose by a staggering 4.33% of which Food Articles accounted for a 6.19% rise. Significant rising price pressures on a sequential basis in Fruits (5.88%), Vegetables (48.75%) of which tomato (209%) and potato (17.45%) can be noted. Pulses, on the other hand, displayed a continued disinflationary trend of -2.98% caused by a supply glut. The other volatile component Fuel and Power noted further slowdown coming in at % vis-à-vis -1.32% observed in the last month. Price levels of all items in this basket, LPG, Petrol and high speed diesel, registered a decline thereby adding downward pressure to the headline fuel inflation number. However, manufactured products accelerated by 2.1%, the lowest increase ever in over a year, mainly led by food and metals. Correspondingly, Core WPI inched higher to 2.19% from 2.12% in June-17. IIP slips into negative territory for the first time since Jun 2013 India s IIP contracted to a four-year low, slipping into negative territory for the first time since 2013 due to a slowdown in manufacturing output following the uncertainty around the rollout of the Goods and Service Tax (GST). On a quarterly basis, factory output growth during April-June slowed down to 2% from 7.1% in the corresponding period last year. 4

Manufacturing sector which holds the maximum weightage of 77% in the overall index registered a decline of 0.4% in June from a robust growth of 7.5% a year ago.

5 Manufacturing sector which holds the maximum weightage of 77% in the overall index registered a decline of 0.4% in June from a robust growth of 7.5% a year ago. Mining production also witnessed a slowdown of growth to 0.4% from 10.2% in the same period a year ago. USE-BASED GROWTH RATE(%) Jun-17 Jun-16 Primary Capital Intermediate Construction Consumer durables Consumer non-durables SECTORAL GROWTH RATE(%) Jun-17 Jun-16 Mining Manufacturing Electricity Meanwhile, the use-based classification of IIP too witnessed a decline led by contraction in output of primary and capital goods. Capital goods output, which is gauge of private sector investment declined sharply by 6.8% in June compared to a growth of 14.8% during the same month last year. Primary goods sector registered a contraction of 0.2% in June from 8.2% in June

6 Consumer durables continued to witness a de-growth of 2.1% in June, compared with 4.5% uptick in June 2016 and a -4.5 % fall in May On the other hand, consumer non-durables rose 4.9% in June from 8.3% in May and 11.4% growth in the same period last year. Infrastructure or construction goods growth was 0.6% in June as compared with a jump of 6.6% last year while Intermediate goods decelerated by 0.6% in June from a growth of 6% in June Outlook: As anticipated, retail inflation reversed from record low levels as costs of food items and housing costs soared. However, we believe the pace of acceleration may not remain as sharp in the coming months as costs of vegetable prices, mainly tomatoes have begun moderating once again in August as supply of the produce normalizes. Coming to industrial output, manufacturing activity has taken a plunge following the rollout of GST amidst uncertainty over its impact that led to de-stocking of inventories. Going ahead, however, we may see a reversal from the latest decelerating trend, as manufacturers start building inventory once again with help from a favorable base effect. However, output is estimated to remain at comparatively lower levels. The sluggish pace of activity can also be gauged by the dip in India s manufacturing PMI that contracted to an eight-year low in July as new orders and output dropped post GST implementation. The Nikkei India Manufacturing Purchasing Managers Index (PMI) for July was at 47.9, marking the first deterioration in business conditions in Services PMI too plunged from June s eight-month high of 53.1 to 45.9 in July. Going ahead, headline inflation reading is expected to remain sub-3% in August post which we may see prints between 3-3.5% in the Oct-Dec period and above 5% in the last quarter of FY18 as second-order effects of higher wage payouts play through. However, the full-year target of 4% still remains attainable, which in the absence of any external shocks could open the room for an RBI rate cut in Q4FY18. Overall, we expect the 10Y bond yield to trade in a range of % in the next 3 months. 6

7 . CIN:U67110MH2006PLC A/B1-801, A Wing, 8th floor, Marathon Innova, Marathon Next Gen Compound, Off. Ganpatrao Kadam Marg, Lower Parel (W), Mumbai Dealing Room: (022) Se lements: (022) , Fax (022) Delhi Office: (011) Kolkata Office: (033) Please mail your feedback to stcipd@stcipd.com Website: THIS COMMUNICATION IS FOR PRIVATE CIRCULATION ONLY. IT IS BASED UPON THE INFORMATION GENERALLY AVAILABLE TO PUBLIC AND CONSIDERED RELIABLE. THIS REPORT DOES NOT CONSTITUTE AN INVITATION OR OFFER TO SUBSCRIBE FOR OR PURCHASE OR SALE OF ANY SECURITY AND NEITHER THIS DOCUMENT NOR ANYTHING CONTAINED HEREIN SHALL FORM THE BASIS OF ANY CONTRACT OR COMMITMENT WHATSOEVER WITH PRIMARY DEALER LTD. 7

Macroeconomic Update: CPI, IIP and WPI

Macroeconomic Update: CPI, IIP and WPI India s retail inflation print for the month of March rose to 5-month high of 3.81% led by a rise in prices of food artciles like fruits, vegetables and fuel. Meanwhile