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IIP&CPI: Macro data clears path for a rate cut in April

Research Digest | April 03, 2019
Index of Industrial Production for the month of January dropped to 1.7%, falling below our estimated growth rate.

The drop in the industrial production is on account of a slowdown in the manufacturing and electricity activity. Manufacturing growth stood at 1.3% as compared to 8.69% a year ago, Electricity stood at 0.80% as compared to 7.63% in Jan 2018 whereas Mining growth grew from 0.26% to 3.90% YoY.

The month of January also witnessed a sharp drop in investing activities as the use based classification data suggests, Consumer durables, consumer non-durables and capital goods all have seen a YoY de- growth and stood at 1.80,3.80 and -3.20% respectively. Infrastructure goods on the other hand have showed positive signs of growth, growing at 7.9% in January.

In the manufacturing sector only 11 out of the 23 segments witnessed positive numbers. Manufacturing of food products (17%) and wearing apparel (16.4%) grew the most. Manufacturing of furniture (-12%) on the other hand contracted the most on a higher base.

Consumer Price Index on the other hand spiked up to 2.57%, a four month high figure, but still below RBI`s comfortable level of 4%.

The rise in the CPI has been on the back of a marginal rise in food inflation. The food price index rose from 135 in January to 135.2. Vegetables continued seeing deflationary pressure whereas fruits saw a trend reversal

The much debated health inflation being termed as a one off by the monetary policy has again inched up in February.

Urban inflation stood at 3.43 percent against rural inflation of mere 1.81 per cent.

Views

With an adverse base the IIP is poised to be around 3-4% levels for the month of February.
Consumer Price Index inching upwards shows an uptick in the food inflation which was long due. We believe the inflation for the next 6 months will stay below the RBI`s 4% levels.
Given the bleak estimates of CPI and IIP in the forthcoming months and a 5 quarter low GDP the future rate cut path for the MPC has been cleared out as the governor believes in going by the factual data in hand keeping in mind the growth outlook.











Exhibit 3: CPI for the month of February rose to 2.57 from 2.05 in January








The RBI in their recent monetary policy has also downgraded the inflation projection going forward. After the recent cut in the repo rate in the February monetary policy the RBI has stated that the interest rates will be a factor of the headline inflation going forward and any move in the monetary policy will be purely data driven signaling an inevitable rate cut in the monetary policy in the month of April.


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