Inflation on track; No cheer for IIP: CRISIL Research

In January CPI inflation rose to 5.11% from 4.28% in December as per the new CPI series. The December figure according to the old series was at 5%. CSO has revised the CPI series with a new price reference year (Base year 2012 = 100) and a new weight reference year (2011-12). In addition, the CSO has also introduced a number of methodological improvements that will make CPI a more accurate and less volatile measure of inflation. In addition, the new CPI gives greater weight to core categories than before.

Despite the rise in inflation in January, inflation remains in the comfortable zone. We expect RBI to deliver rate cuts in the range of 50-75 bps in the next fiscal.  We expect inflation to average at 6.5% for this fiscal. For 2015-16, we expect inflation to average at 5.8% supported by lower oil prices, normal monsoons, pro-active steps by the government and better monetary and fiscal coordination.

Industrial production growth slowed to 1.7% in December from 3.9% in November. The slowdown was led by the mining and electricity sectors where average growth fell to 0.6% from 6.8% in the previous month. Manufacturing growth also slumped in December. With this, IIP growth in the fiscal so far stands 2.1%, which is much below the 5.6% industrial GDP (ex-construction) growth measured by the new GDP series, for the same period. The existing IIP series therefore is now a poor representative of industrial GDP growth as the wedge between IIP growth and Industrial GDP growth has increased. For fiscal 2014, IIP growth was estimated at -0.1% in contrast to industrial GDP at 5.3%. A similar pattern is expected to play out in fiscal 2015- IIP growth in the first three quarters of this fiscal is estimated at 2.1% as against industrial GDP (ex- construction) growth of 5.6%.

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