Macroeconomic Update: CPI, IIP and WPI

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Sylvia Sparks
5 years ago
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1 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 Core CPI, that strips out food and energy prices inched higher to 4.9% from 4.83% in February. Consumer Food Price Index(CFPI) however accelerated at a slower pace of 1.93% in March, with the pace of decline in prices of vegetables slowing down to -7.24% in March as against -8.29% seen a month ago. Inflation in Urban and Rural India also accelerated to 2.27% and 1.85% respectively. India s Index of Industrial Production contracted 1.2% in February, its lowest level in 4 months from a growth of 2.7% a month ago as manufacturing and consumer goods faced pressures. WPI accelerated, albeit off multi-year high seen as prices of fuel and manufactured products moderated despite an uptick in food articles. Although inflation inched higher as anticipated, the print remained below market expectations of 3.9% and RBI s Q4FY17 target of 5%. However, core inflation still needs to be closely watched. Hereon, we believe that inflation is set to rise above 4% in the coming months due to unwinding of favorable base effects and uncertainty over how monsoons pan out. This could prompt the central bank to keep rates on hold in H1FY18. Consumer Price Inflation: Remains well within RBI s 5% Q4FY17 target As anticipated, inflation accelerated to a five-month high of 3.81% in March, albeit remaining comfortably within RBI s target of 5% for March-17. The uptick was mainly led by a rise in prices of food articles and fuel. Meanwhile, core inflation, that excludes energy and food prices rose closer to the 5% mark to 4.9%. The deceleration in prices of vegetables continued to take a breather, marking its slowest pace of decline since Oct The index which accounts for 6.04% of the CPI basket fell 7.24% in March from -8.29% a month ago. 1

2 Meanwhile, prices of fruits rose to its highest level since Jan 2015 to 9.35% in March from 8.33% in February. The component of fuel and light that comprises of 6.84% of the overall CPI basket surged to 5.56%, its fastest pace of growth since August The uptick in the energy index can also be gauged from the uptick in the 'transport and communication' component that rose to 6.04% last month from 5.39% in February. This print marked its highest level since Jun However, the overall basket was supported by a decline in prices of pulses (-12.42%), sugar and confectionary (17.05%), and meat and fish (2.96%). Prices of pulses slipped into negative territory for the fourth straight month marking a decline of 12.42% as compared to -9.02% in February. Meanwhile components like personal care (4.52%), household goods (4.08%), health (3.99%), recreation (3.57%) and education (5.20%) moderated in the month of March. Index of Industrial Production: Contracts to four-month low India s industrial activity declined to its slowest pace in four-months led by a fall in manufacturing activity and production of capital and consumer goods. However, in the Apr-Feb period, IIP registered a growth of 0.4% as compared to 2.6% a year ago. 2

3 The manufacturing sector that holds 75% weightage in the overall index declined 2% as compared to a growth of 2.3% reported in January. Meanwhile, capital goods too declined 3.4% in February as against a staggering growth of 10.7% in January. This compares to a decline of 9.3% in the year-ago period. Consumer goods too declined 5.6% from an uptick of 1% in January. In the eleven months since April 2016, the index jumped merely 0.1% compared to 3.2% growth in the same period a year ago. In the consumer durables segment, output declined 0.9% as against a growth of 2.9% in January and 10.4% growth in the corresponding period a year ago. The non-durables registered a sharp decline of 8.6% versus fall of 4.9% and 3.2% a year ago and in January respectively. However, basic goods segment reported a growth of 2.4% in February albeit at a slower pace since 5.4% reported a year ago. The segment rose 5.3% in January. Wholesale Price Index WPI: Moderates from 3-year high despite uptick in food prices Wholesale Price-based inflation moderated from a three-year high in the month of March led by a slowdown in prices of fuel and manufactured products, despite firming of prices of food articles. The fuel and power component that holds weightage of 14.91% in the total basket moderated to 18.16% in March from 21.02% in the previous month. Further, prices of minerals took respite rising 23.54% in March from a surge of 31.03% in February. Similarly, manufacturing products that holds the maximum weightage in the basket (64.97%) accelerated at a slower pace of 2.99% last month from 3.66% in February. However, the food articles index marked an upswing of 3.12% from 2.69% in February, mainly led by a surge in prices of items like vegetables, onions and pulses. Prices of vegetables accelerated 5.70% in March rebounding from a decline of 8.05% seen in the previous month. 3

4 Items of onions and pulses too reported a slower pace of deceleration of % and % respectively. Outlook: India s inflation in the coming months is expected to remain above 4% as unwinding of favorable base effects and below normal monsoons this year could elevate price pressures. As reiterated by the RBI at the April policy meeting, several upside risks including likely El Nino conditions, one-off impact of GST rollout and higher wage payouts under 7 th Pay Commission is expected to impart uncertainty to the inflation trajectory. RBI at the meeting also raised inflation forecast to 4.5% in H1FY18 and 5% in H2FY18. These domestic concerns coupled with global uncertainty regarding Federal Reserve s rate hike path and possibility of a rise in crude oil prices could further deter the RBI from slashing interest rates in the coming months. In our view, RBI may have to keep rates on hold for the first-half of the fiscal year and decide its future course thereon based on developing global and domestic events. 4

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Macroeconomic Update: CPI, WPI and IIP

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