India: CPI dips further; headline IIP beats estimates

[Rajesh Desai]

 

Headline IIP surprised on the upside at 5.7% YoY in November as against (-)1.8% YoY growth previously. December CPI print fell further to 3.41% YoY from prior of 3.63% YoY as vegetables inflation plunged. Core inflation edged lower by 8 bps to 4.9% YoY. We expect a further 25 bps rate cut. However, any easing will be strictly contingent on data. November IIP provides positive surprise Source: CEIC, ICICI Bank Research Consumer goods and capital goods exhibit sharp recovery The November IIP came in much higher than expectations at 5.7% YoY as compared to -1.8% YoY in the previous month. On a sequential basis, the metric contracted 1.3% which was again better than expectation. On the sectoral side, all components showed positive growth and mining and manufacturing both showed substantial uptick. The sharp increase in electricity growth also helped to underpin the headline print. Industry groups such as tractors, telephone instruments, passenger cars, insulated rubber cables etc. have seen sharply higher growth over the month. Industries which were the key laggards were gems and jewellery, kerosene, H R sheets etc. On the use based classification, capital goods posted the first positive growth since October 2015. Components such as insulated rubber cables also aided as it grew by 185% YoY. We have been worried about consumer non-durables for a while now and the November print seems to have made some headway in allaying this. It printed 2.9% YoY after stagnating for a while. This component is a proxy for consumption demand and it seems to have held up during November despite the note ban. We will continue to watch this segment for trend confirmation. Robust agricultural output and pay panel awards in FY2017 are likely to support it going ahead. The November headline and capital goods print also gained on favourable base effect and we will watch monthly prints going ahead to ascertain whether manufacturing climate in the country has sustainably turned a corner. Inflation fell on the back of decrease in food inflation (especially vegetables) Source: CEIC, ICICI Bank Research Inflation cools further as vegetable inflation falls CPI inflation cooled to 3.41% YoY in December from 3.63% YoY in the previous month. On a sequential basis, headline CPI index recorded a second consecutive month of decline at (-) 0.6% MoM vs. (-) 0.2% MoM previously. Food inflation edged down to 1.98% YoY from 2.56% YoY. The most significant development seen was the sharp plunge in vegetables inflation. On a month-on-month basis, the metric recorded its first double digit decline in 3 years. Additional price relief was seen from most food categories. Pulses inflation entered deflationary territory in December and protein ex-pulses witnessed a slowdown in momentum. However, cereals inflation recorded its tenth consecutive month of rise at 5.3% YoY (prior: 4.8% YoY) and sugar inflation continued to stay in double digit territory. Core inflation fell by ~8 bps to 4.9% YoY. Fall in services ex-transport to 5.0% YoY from 5.2% YoY aided the core print. Within this segment, personal care and recreation saw some cooling. Transport & communication inflation rose in line with recent rise in crude prices.   The core-core CPI was at 4.73% YoY as against 4.89% YoY previously. Policy easing to remain data contingent Our projections currently show inflation significantly undershooting RBI’s 5% March target. We continue to expect a 25 bps rate cut, however, any room for further easing will be strictly contingent on data and will warrant close monitoring of the growth-inflation dynamics. Regards, ICICI Bank Contact: Kamalika Das (+91-22) 2653-1414 (extn: 6280) kamali...@icicibank.com Niharika Tripathi (+91-22) 2653-1414 (extn: 6943) niharika.tripathi@icicibank.com ​

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CA. Rajesh Desai