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CRISIL IndiaInsights
Apr – May 2021 Food for thought
Consumer Price Index (CPI)-linked inflation surged with the onset of the pandemic and resultant lockdown in March 2020. This was surprising, and in contrast to the experience of most other major economies, where the gauge fell because of massive demand destruction. As the economy braces for the second wave and renewed restrictions, inflation will be a crucial determinant of India’s efforts to recover economically, and food prices, the driver of inflation trajectory.
Our analysis of quarterly movement in headline CPI inflation, suggests food & beverages has the maximum correlation or a linear relationship with headline inflation, followed by core and fuel & light inflation. Food has historically punched more than its weight in headline inflation, despite a lower weight compared with core. Not only does food inflation guide headline inflation the most, but also is the most volatile. Its standard deviation (a measure of volatility) for the analysis period was more than double that in core, the most stable category. Of the 12 major sub-categories of the Indian CPI food basket, vegetables, cereals & products, and milk & products have generally been relatively large contributors to overall food & beverage inflation. And within these, vegetables have dominated. The role of the other two has, in fact, diminished over the years.
Poor monsoons have statistically not been be associated with high food inflation. Comparison of annual rainfall and food inflation trends since fiscal 1991, revealed a weak relationship between both, which is not entirely surprising, given that a) our CPI food basket includes categories that are not directly dependent on monsoon, and b) temporal and spatial distribution of rainfall matters more than the all-India average rainfall.
A key concern on the inflation front since the past few months has been the sharp rise in international commodity prices. We found a reasonable degree of positive relationship between international commodity prices and Wholesale Price Index (WPI)- linked manufacturing inflation. But the relationship with CPI core inflation is not only weak but also negative.
CRISIL estimates CPI inflation will soften this fiscal. This is premised on food inflation, the key driver of headline inflation, falling this fiscal because of a high base effect, and forecast of a normal monsoon, suggesting healthy agriculture output, which should keep a tab on food prices. That said, vegetable inflation will remain a key monitorable and can create wild swings in food inflation.
Pandemic-related supply/logistics disruptions too have an upside risk to food inflation. The rise in real gross domestic product (GDP) growth this fiscal, statistically doesn’t pose a risk to core inflation. Moreover, growth this fiscal is largely optical in nature, on the low base of previous fiscal. International commodity prices, barring crude oil, too do not pose an incipient risk to retail core inflation. That said, stickiness in core can persist as demand conditions improve compared with fiscal 2021. In sum, core inflation is expected to remain sticky going ahead, but is unlikely to shoot up significantly.
FY20 FY21 FY22F
GDP (%, y-o-y) 4.2 -8.0* 11.0
CPI inflation (%, average) 4.8 6.2 5
Fiscal deficit (% of GDP) 4.6 9.5^ 6.8^^
10-year G-sec yield (%, March) 6.2 6.2 6.5
CAD (% of GDP) -0.9 1.5# -1.4
Rs per $ (March) 74.4 72.8 75.0
Note: *NSO estimate, ^Budget estimate, ^^Revised estimate, #CRISIL estimate Source: National Statistical Office (NSO), RBI, Ministry of Finance, CRISIL Research
Food inflation is the most volatile
Source: NSO, CRISIL 4.01
3.04
2.45
1.69
0 1 2 3 4 5
Food &
beverages
Fuel & Light Headline Core Standard deviation (%)
2
BOP
Capital inflows outpace CAD
● India's current account balance turned deficit at 0.2% of GDP in Q3 of fiscal 2021, compared with surplus of 2.4% of GDP in Q2
● With improving domestic demand and recovering imports, goods trade deficit reached close to pre-pandemic levels
● Foreign capital flows outpaced the current account deficit (CAD) driven by record high foreign portfolio investor inflows
● CRISIL expects current account balance to average a deficit of 1.4% of GDP in fiscal 2022 compared with an estimated surplus
of 1.5% of GDP in fiscal 2021 Source: RBI, CEIC, CRISIL
Industrial Production
Decline continues● Index of Industrial Production (IIP) contracted for the second straight month, down 3.6% on-year in February after January’s 0.9% fall
● Both manufacturing and mining contracted for the second and fifth month consecutively; electricity was almost stagnant
● Rising Covid-19 cases and resultant lockdowns could mean persistence of weakness in industrial activity in the near term
● Large-scale vaccination and the Covid-19 trajectory would
remain key monitorables for industrial activity Source: NSO, CRISIL
Inflation
Base lift, core worry
● CPI inflation rose to 5.5% in March from 5% previous month, again moved closer to the upper limit of the Reserve Bank of India’s (RBI) target 2-6% range
● Higher food and fuel inflation drove the rise in CPI, even as core inflation remained sticky
● WPI inflation surged to 7.4% from 4.2%, driven by rising commodity prices
● CRISIL expects CPI inflation to average 5% this fiscal compared
with 6.2% in fiscal 2021 Source: NSO, CRISIL
Interest Rate
Yields climb again● Yield on the 10-year government security (G-sec) averaged 6.19%
in March, 11 basis points higher on-month
● Investor sentiments were dampened by the RBI's refusal to accept bids for higher yields in G-Sec auction. Rising US Treasury yields and crude oil prices further put pressure
● However, pressures eased towards the end of the month as the RBI cancelled last auction for issuing G-secs
● CRISIL expects the 10-year G-sec yield to rise to 6.5% average in
March 2022 from 6.2% average in March 2021 Source: Clearing Corporation of India Ltd, CRISIL -35
-20 -5 10 25 40
Q3FY20 Q4FY20 Q1 FY21 Q2 FY21 Q3 FY21
$ billion
Current account balance FDI inflows FPI inflows
3.8
-0.8
-11.3 3.8
-1.4
-12.6
FY19 FY20 FY21
(Apr-Feb) FY19 FY20 FY21 (Apr-Feb)
General Manufacturing
Y-o-Y (%)
3.4
4.8
6.2
4.3
1.7 1.2
FY19 FY20 FY21 FY19 FY20 FY21
CPI WPI
Y-o-Y (%)
6.5
5.0
4.1
7.5
6.2 6.2
Mar-19 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21
1-yr G-sec 10-yr G-sec
Average (%)
3
Rupee
Steady as it goes
● The exchange rate remained stable at 72.8/$ in March, as against February, with rupee-supporting and depreciating factors balancing on average
● Surge in Covid-19 cases, higher imports, and appreciation of the dollar index put downside pressure; net positive foreign investments provided support
● Major emerging and advanced market currencies weakened against the dollar
● CRISIL expects the rupee to average 75/$ this fiscal-end Source: RBI, CRISIL
Trade
Low base lends lift
● Merchandise exports grew 60.3%, while imports grew 53.7% on- year in March, with gems and jewellery and petroleum products driving both. The high growth could be misleading because of the considerable strong base effect from 2020
● Decline in services exports and imports slowed in February
● CRISIL expects higher GDP growth this fiscal to lead to stronger import growth. Increased commodity prices, especially crude oil – India’s largest import item – will further drive import growth
Source: Ministry of Commerce, CRISIL
Global developments
Parameters US UK EA Japan China
GDP (q/q, annualised %) Q4-2020 4.0 1.0* -0.7* 12.7 6.5^
CPI Inflation (y-o-y %) Feb'20 1.7 0.4 0.7 -0.4 -0.2
Trade balance (national currency, billion) Feb'20 -71.1 -1.4 17.7 215.8 13.8#
Policy rate (%) Mar'20 0-0.25 0.10 0.0 -0.1 3.85
Note: *Not annualised, ^y/y, #$ billion Source: Statistical bureau, respective countries
● The outlook for recovery in the US has brightened considerably, with economic activity gaining momentum. Jobs data showed massive gains in March. Trade deficit widened further in February to $71.1 billion, from $67.8 billion in January, owing to higher decline in exports as against imports. In its latest meeting, the US Fed revised up its GDP forecast; it expects a spike in inflation in Q2 on Covid-19 distortions
● Eurostat expects the euro area (EA) annual inflation at 1.3% in March, up from 0.9% in February. The energy sector exited the deflation phase and is expected to have the highest annual rate in March. Unemployment rate continued to be stable at 8.3%
in February. Trade surplus widened to €17.7 billion from €6.3 billion in January, but narrower than €23.4 billion in February 2020
● The United Kingdom (UK) GDP is estimated to have grown 0.4% in February, increasing from 2.2% decline in January, but 7.8%
below February 2020 level and 3.1% below October level, when there was an initial recovery peak. Trade deficit widened £0.5 billion in February to £1.4 billion as imports increased more than exports. The rise in exports was driven by increased exports to the European Union (EU), while increasing imports were driven by non-EU countries
Japan’s deflation woes continued into February, but with some easing. Trade surplus continued to narrow on-month in February to ¥215.8 billion from ¥325.5 billion. Exports growth turned negative again after being in positive territory for two consecutive months, declining 4.5% on-year. However, imports increased 11.8% after serial contraction since 2019
● China’s economy maintained momentum in the last quarter of 2020, led by infrastructure investment, real estate, and exports.
Manufacturing activity displayed an uptick after declining for three consecutive months. Trade surplus narrowed in March to
$13.8 billion, as imports (38.1%) rose more than exports (30.6%). Improving global demand and higher commodity prices led to increments in both exports and imports. The double-digit growth print is largely attributed to the base effect from the last year
69.5 74.4 72.8 78.5 82.3 86.7
Mar-19 Mar-20 Mar-21 Mar-19 Mar-20 Mar-21
INR/US$ INR/Euro
Period average
8.8
-5.1
-7.1
10.6
-7.7
-17.6
FY19 FY20 FY21 FY19 FY20 FY21
Exports Imports
Y-o-Y (%)
Argentina | China | Hong Kong | India | Poland | Singapore | UK | USA | UAE
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Data Summary
Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21
Industrial Production* (%, y-o-y)
General 4.5 -1.6 1.6 -0.9 -3.6 -
Mining -1.0 -5.4 -4.2 -2.5 -5.5 -
Manufacturing 4.5 -1.6 2.1 -1.3 -3.7 -
Electricity 11.2 3.5 5.1 5.5 0.1 -
Primary Goods -3.1 -1.8 -0.1 0.7 -5.1 -
Capital Goods 3.2 -7.5 1.5 -9.0 -4.2 -
Intermediate Goods 3.2 -1.8 2.2 0.9 -5.6 -
Infrastructure and Construction Goods 10.9 2.1 2.7 1.8 -4.7 -
Consumer Durables 18.1 -3.2 5.7 -0.2 6.3 -
Consumer Non-Durables 7.3 -0.7 0.5 -5.4 -3.8 -
Inflation (%, y-o-y)
WPI-All Commodities 1.3 2.3 2.0 2.5 4.2 7.4
WPI-Primary Articles 2.0 0.7 -3.1 -2.1 0.3 0.6
WPI-Manufactured Products 0.2 1.0 1.4 1.6 0.3 1.3
WPI-Fuel & Power -1.1 3.6 2.9 3.9 3.5 5.3
CRISIL Core Inflation Indicator (CCII) 2.5 3.4 3.7 4.7 4.7 5.9
CPI (General) 7.6 6.9 4.6 4.1 5.0 5.5
Merchandise trade (%, y-o-y)
Exports -4.9 -8.5 0.5 6.2 0.7 60.3
Imports -10.5 -12.3 8.3 2.0 7.0 53.7
FOREX Reserves ($ billion)** 560.7 574.8 580.8 590.2 584.6 582.0
Markets##
BSE SENSEX 39614 44150 47751 46286 49100 49509
NIFTY 50 11642 12969 13982 13635 14529 14691
SENSEX P/E 28 31 34 32 34 34
Exchange Rate#
INR/$ 4.5 -1.6 1.6 -0.9 -3.6 -
INR/GBP -1.0 -5.4 -4.2 -2.5 -5.5 -
INR/EURO 4.5 -1.6 2.1 -1.3 -3.7 -
INR/ 100 YEN 11.2 3.5 5.1 5.5 0.1 -
INR/Chinese Yuan -3.1 -1.8 -0.1 0.7 -5.1 -
Interest Rates (%)## 3.2 -7.5 1.5 -9.0 -4.2 -
Base rate$ 3.2 -1.8 2.2 0.9 -5.6 -
1-Year GoI Paper@ 10.9 2.1 2.7 1.8 -4.7 -
10-Year GoI Paper@ 18.1 -3.2 5.7 -0.2 6.3 -
Note: #Monthly averages, ##Month-end, @Semi-annualised, $10 banks, **As on March 12, 2021 Source: RBI, Government of India (GoI), BSE, CSO, CRISIL Research
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