Moneycontrol
Last Updated : Sep 14, 2018 08:59 AM IST | Source: Moneycontrol.com

Inflation cools off, manufacturing output increases. Here's what experts are saying about the data

India’s retail inflation fell to 3.69 percent in August, lowest in ten months, driven by cheaper food items while IIP growth for the April-July period was 5.4 percent compared to 1.7 percent in the year ago period.

Sandip Das @Im_Sandip1

India’s retail inflation fell to 3.69 percent in August, lowest in ten months, driven by cheaper food items, according to official data released on Wednesday.

Retail inflation, measured by Consumer Price Inflation (CPI), had hit a nine month low at 4.17 percent in July and came in at 3.28 percent in August last year. The slow pace of price rise comes after the central bank hiked benchmark repo rates by 0.25 percent twice in its bi-monthly monetary policy meetings in June and August.

Among factors that influenced the projection was an increase in the minimum support price (MSP) of kharif crops of at least 150 percent, volatility in global financial markets and crude oil prices as well as significant rise in core inflation, among others.

Consumer food price inflation, a metric to gauge changes in monthly kitchen costs, fell 0.29 percent in August from 1.37 percent a month ago. Prices of vegetables witnessed a de-growth of 7 percent in August from (-) 2.19 percent in July.

India’s industrial production (IIP) growth fell to 6.6 percent in July as compared to a revised 6.9 percent in June, data released by statistics office showed. It had expanded 1 percent in July last year. The June IIP figure has been revised from 7 percent earlier.

Industrial production grew on the back of good performance by the manufacturing sector and higher off-take of capital goods and consumer durables. IIP growth for the April-July period was 5.4 percent compared to 1.7 percent in the year ago period.

Manufacturing sector, which accounts for more than three-fourths of the entire index, came in at 7 percent in July as compared to 6.9 percent in June and a contraction of 0.1 percent in the same month last year.

Lets take a look at how top researchers and broking firms have reacted to the CPI & IIP numbers:

Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global Financial Services

IIP growth likely to accelerate in FY19

July 2018 IIP momentum remained strong at 6.6 percent YoY, following the cue from last month’s reading of 6.9 percent. Both these numbers are on lower base of last year, which has been broadly on expected lines.

Consumer durables sector which had declined since demonetization till October 2017, is likely to continue to depict a much stronger number. This coupled with government reflationary to improve rural economy is likely to further boost the sectors performance.

We attribute the cyclical uptick in IIP to higher government revenue spending, depreciation in rupee/dollar, rising household leverage and improving income levels. IIP growth in FY19 is likely to accelerate to an average of 6-6.5 percent against 4.4 percent in FY18; up till now the average for Apr-July 2018 is at 5.5 percent.

RBI might pause in October 2018 policy

Retail inflation continued to ease, as it dropped to 3.7 percent YoY in August 2018 against our expectation of 3.4 percent. Persistent volatility in food inflation eased the overall CPI reading, as excluding vegetables the CPI remained elevated at 4.8 percent YoY, tad lower than July 2018 reading.

Core inflation remained elevated at 5.9 percent YoY, with currency depreciation, pipeline inflation from rising input prices, rising household inflation expectations (based on RBI survey), and improvement in demand conditions the core inflation pressure is likely to intensify.

Urban core CPI has increased at a much faster pace than rural CPI, which signifies relatively stronger improvement in demand in urban areas vis-à-vis rural areas. This is also reflected in IIP numbers, widening Current Account Deficit (CAD) and strong retail credit growth of 16.7 percent YoY in July 2018.

Based on last two months CPI reading, RBI might pause in October 2018 policy with a more hawkish policy on rising currency depreciation risk.

CARE Ratings

CPI inflation may remain in 5-5.5% range

CPI inflation has come in at 3.7 percent for August against our expectations of 4 percent helped by a high base effect which will provide support for the next 2-3 months. However, there is still discomfort in this number as it has been kept at the sub-4 percent level mainly due to the food products category which has a weight of around 54 percent in the index. An increase of just less than 1 percent due to sharp declines in prices of vegetables, pulses and sugar.

The non-food components continue to exhibit higher growth rates- especially fuel and light which had gone up by 8.5 percent. This component would tend to increase further in the coming months.

House rent and the miscellaneous categories have registered above 5 percent inflation rates which will persist.

Going ahead, the cushion of declining food prices may be reversed if the MSP is effective. Harvest will be good this time and there can be certain decline in prices that may be overwhelmed in case MSP becomes effective.

We are looking at CPI inflation in 5-5.5 percent range by end March.

Given the developments in oil market and currency we expect a rate hike of 25 bps in October policy notwithstanding the sub-4 percent inflation number.

IIP numbers higher than expectation of 5%

IIP growth has come in at a steady 6.6 percent which is higher than our forecast of 5 percent. Cumulative growth is 5.4 percent, which is encouraging and indicates that moving in the range of 5-6 percent for the year would be possible on a low base.

We must be however cautious on these numbers as the low growth of 1 percent last year in July and 1.7 percent (April-July) has contributed to this better picture.

Consumer oriented industries have driven growth: auto, electronics, textiles, garments. Infra too has been supportive which is positive for the economy.

Capital goods growth has slowed down to 3 percent though has been impressive on cumulative basis and would have to be watched closely. Low base effect has provided an impetus here. While electric machinery has done well, non-electrical continues to trail.

The base effect has helped to maintain a certain level of buoyancy as last year was typified by the GST effects that depressed production processes especially in SME segment.

Aditi Nayar, Principal Economist, ICRA

The IIP growth print for July 2018 was modestly higher than expected, providing another upside surprise on the back of the robust GDP growth in Q1 FY2019.

While mining and electricity posted a sequential dip in growth in July 2018 relative to the previous month, the firming up of manufacturing growth is encouraging.

A sequential loss of momentum in capital goods, primary goods and intermediate goods was largely offset by a healthy uptick in consumer durables, consumer non-durables and construction goods. The double-digit growth in consumer durables for the second month in a row, benefits from a favourable base effect.

Looking ahead, the GST rate cuts and the upcoming festive season may support the momentum of growth of consumer durables, even as possible price rise related to the currency depreciation and higher commodity prices may curtail demand to an extent. An adverse base effect is likely to continue to weigh upon the growth of capital goods in the next few months.

The slowdown in growth of coal output, electricity generation and automobile production, as well as an unfavourable base effect, are likely to dampen the IIP growth for August 2018 to 4.5-5 percent.

The YoY growth in output of Coal India Limited eased sharply to 3.2 percent in August 2018 from 10.7 percent in July 2018, reflecting an unfavourable base effect, which is likely to dampen the performance of mining in that month.

Moreover, data released by the Central Electricity Authority (CEA) indicates that growth of electricity generation moderated to 3 percent in August 2018 from 4.4 percent in July 2018, led by thermal electricity generation.

However, the growth in hydroelectricity generation recorded a considerable uptick to 19.8 percent in August 2018 from 2.1 percent in the previous month, benefitting from the improvement in reservoir levels.

In addition, the data released by the Society of Indian Automobile Manufacturers indicates that the growth in aggregate auto production eased substantially to 6.8 percent in August 2018 from the healthy 17.1 percent in July 2018.
First Published on Sep 14, 2018 08:58 am
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