CPI edges up to 4% goal;
textiles, tobacco crimp IIP
CRISIL First Cut
April 2017
2
Inflation inches closer to RBI’s medium-run target of 4%
Consumer price index (CPI)-based inflation edged higher in March to 3.8%, driven by higher inflation in fuel, housing and clothing, and footwear. That compares with 3.7% in February. In March, fuel inflation (petrol, diesel, fuel and light) jumped over 190 basis points (bps) compared with February. However, core inflation stayed sticky (CPI excluding food, fuel and light rose mildly to 5%, while CPI excluding food, fuel, light, petrol and diesel was unchanged at 4.5%). The stubbornness in core inflation has kept the central bank vigilant on upside pressures. Also, inflation expectations of households have started to rise again. The March 2017 round of household survey by the Reserve Bank of India (RBI) reveals an increase in inflation expectations in the range of 20-50 bps, over the previous quarter survey.
In view of the rising risks to inflation, the Monetary Policy Committee (MPC) last week, retained its ‘neutral’ monetary policy stance. The committee reaffirmed its CPI inflation target of 4% for the medium term. But now it has telegraphed a glide path that takes CPI inflation to an average of 5% in the second half of fiscal 2018, and 4.6% in the fourth quarter of fiscal 2019. These can be seen as interim targets in the journey towards 4%. Had the goal of achieving 4% inflation target been advanced, it would have warranted strong disinflationary bias in the monetary policy.
This has now been avoided.
The sharper-than-expected fall in inflation over the past few months – led by a plunge in perishables inflation because of demonetisation – has already started correcting as remonetisation gained currency. And food price pressures could build anew if El Niño disrupts the south-west monsoon this year. To boot, core inflation, which has been sticky, could edge up if domestic demand improves. Pent-up demand after demonetisation, lower bank lending rates, the second tranche of payments based on the Seventh Pay Commission recommendations, and an uptick in global oil, metals and agri-commodity prices after ~3 benign years, will slowly push inflation higher in fiscal 2018.
We estimate CPI inflation to rise to 5% average in fiscal 2018, from 4.5% in fiscal 2017.
Fuel inflation jumped in March led by rising global oil prices. Average global crude oil prices were 40% higher on-year in the month, and about 3% higher in fiscal 2017, pushing up the imported component of inflation. That was reflected in fuel inflation (petrol, diesel, fuel and light) which rose to 8.4% in March from 6.5% in February.
The recent appreciation in the rupee, if sustained, will tamp imported inflation.
Food inflation stood unchanged from the previous month, at 2%, as inflation in fruits, vegetables, eggs and meat rose, while that in pulses, cereals and sugar, inflation slipped. During November 2016 to January 2017, perishables’ inflation – having a weight of 50% in the food index – fell sharply, bringing down food inflation.
However, with remonetisation causing currency in circulation to rise, perishables’ inflation is back at 1.3% in March, up from a low of -2.3%. For fiscal 2017, however, food inflation dropped to 4.2% from 4.9% in fiscal 2016.
The worry continues to be on the core inflation front. Core inflation (CPI excluding food, fuel and light), has stayed sticky around 5% for the past six months, while the other measure of core inflation (CPI excluding food, petrol, diesel, fuel and light) stood unchanged from the previous month, at 4.5%.
3
IIP declines as manufacturing shrinks
After a positive upturn in January – negating the demonetisation impact on industrial activity – the Index of Industrial Production (IIP) took a U-turn and declined in February. In yet another indication of volatility, IIP registered a growth of -1.2% on-year in February after a positive growth of 3.3% (revised upwards from 2.7%) in January. Cumulatively, therefore, IIP grew a meagre 0.4% during April-February in fiscal 2017 compared with 2.6% in the same period last fiscal. Please note that the Central Statistical Office is expected to come out with a new IIP series on the revised base year of 2011-12 soon, and this is expected to correct some of the anomalies associated with the present series which is continuing on the old base of 2004-05.
Industrial activity declined yet again as IIP registered de-growth of 1.2% in February after a growth of 3.3%
(revised upwards from 2.7%) in January. The decline was on account of a fall in the manufacturing sector – the biggest contributor to IIP with roughly 75% weightage – and poor growth in the electricity sector. These sectors de-grew 2% and 0.3%, respectively. Fifteen out of twenty two manufacturing industries grew over the year. Mining sector displayed a healthy growth of 3.3%, suggesting increased production activity on account of firming up of commodity prices.
The decline in IIP can be again attributed to consumer-oriented sectors, which performed poorly for the third consecutive month, possibly suggesting the impact of cash crunch that followed demonetisation is still at play.
Output in consumer-oriented sectors fell 7.2% in February, after de-growing an average 3.6% in the previous two months. Output in the investment and industrial-oriented sectors, on the other hand, was up 2% in February, marking the fourth consecutive month of growth. The two biggest contributors to the decline in growth of consumer-oriented sectors were textiles (61.6% weight) and tobacco products (15.7% weight), which de-grew 4.1% and 42.8%, respectively. As for the industrial and investment oriented sectors, key categories that did well were basic metals (113.4% weight) and chemical and chemical products (100.6% weight). They grew by 9.9%
and 5.9%, respectively.
According to the use-based classification, slowdown was seen across all the segments except basic goods which grew by 2.4% in February. Capital goods production fell by 3.4% on a negative base. Consumer goods registered greater decline of 5.6%. Both consumer durables and consumer non-durables contributed to the fall, by de- growing 0.9% and 8.6%, respectively.
Analytical contacts:
Dharmakirti Joshi Dipti Deshpande Adhish Verma
Chief Economist, CRISIL Ltd. Senior Economist, CRISIL Ltd. Economist, CRISIL Ltd.
[email protected] [email protected] [email protected]
Media Contacts:
Saman Khan Khushboo Bhadani
Media Relations Media Relations
CRISIL Limited CRISIL Limited
D: +91 22 33423895 D: +91 22 3342 1812
M: +91 9594060612 M: +91 72081 85374
B: +91 22 3342 3000 B: +91 22 3342 3000
Argentina | China | Hong Kong | India | Poland | Singapore | UK | USA
CRISIL Limited: CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai – 400076. India Phone: + 91 22 3342 3000 | Fax: + 91 22 3342 3001 | www.crisil.com
About CRISIL Limited
CRISIL is a global, agile and innovative analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 100,000 customers.
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
About CRISIL Research
CRISIL Research is India's largest independent integrated research house. We provide insights, opinion and analysis on the Indian economy, industry, capital markets and companies. We also conduct training programs to financial sector professionals on a wide array of technical issues. We are India's most credible provider of economy and industry research. Our industry research covers 86 sectors and is known for its rich insights and perspectives. Our analysis is supported by inputs from our network of more than 5,000 primary sources, including industry experts, industry associations and trade channels. We play a key role in India's fixed income markets. We are the largest provider of valuation of fixed income securities to the mutual fund, insurance and banking industries in the country. We are also the sole provider of debt and hybrid indices to India's mutual fund and life insurance industries. We pioneered independent equity research in India, and are today the country's largest independent equity research house. Our defining trait is the ability to convert information and data into expert judgments and forecasts with complete objectivity.
We leverage our deep understanding of the macro-economy and our extensive sector coverage to provide unique insights on micro-macro and cross-sectoral linkages. Our talent pool comprises economists, sector experts, company analysts and information management specialists.
CRISIL Privacy Notice
CRISIL respects your privacy. We use your contact information, such as your name, address, and email id, to fulfil your request and service your account and to provide you with additional information from CRISIL and other parts of S&P Global Inc. and its subsidiaries (collectively, the
“Company”) you may find of interest.
For further information, or to let us know your preferences with respect to receiving marketing materials, please visit http://www.crisil.com/privacy.
You can view the Company’s Customer Privacy at https://www.spglobal.com/privacy.
Last updated: April 2016
Disclaimer
CRISIL Research, a division of CRISIL Limited (CRISIL) has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.
