Amidst the very negative environment surrounding the rupee and petrol prices, the latest releases on CPI inflation and IIP growth come as a relief.
1. CPI inflation has come in at 3.7% for August against our expectations of 4% 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% level mainly due to the food products category which has a weight of around 54% in the index. An increase of just less than 1% due to sharp declines in prices of vegetables, pulses and sugar.
a. The non-food components continue to exhibit higher growth rates- especially fuel and light which had gone up by 8.5%. this component would tend to increase further in the coming months.
b. House rent and the miscellaneous categories have registered above 5% inflation rates which will persist.
c. 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.
d. We are looking at CPI inflation in 5-5.5% range by end March.
e. Given the developments in oil market and currency we expect a rate hike of 25 bps in October policy notwithstanding the sub-4% inflation number.
2. IIP growth has come in at a steady 6.6% which is higher than our forecast of 5%. Cumulative growth is 5.4%, which is encouraging and indicates that moving in the range of 5-6% for the year would be possible on a low base. We must be however cautious on these numbers as the low growth of 1% last year in July and 1.7% (April-July) has contributed to this better picture.
a. Consumer-oriented industries have driven growth: auto, electronics, textiles, garments. Infra too has been supportive which is positive for the economy.
b. Capital goods growth has slowed down to 3% 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.
c. 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.
The author is chief economist, CARE Ratings