E
CO
S
COPE
CPI inflation cools off; IIP at six-month high
Rate cut unlikely next month
12 March 2020
The Economy Observer
CPI-based retail inflation cooled off to 6.6% in Feb’20 (v/s 7.6% in Jan’20) after trending higher for six months. The
number was marginally lower than consensus of 6.7% but higher than our estimate of 6.3%.
As expected, food inflation continued moderating in the month. CPI inflation in food came in at 10.8% in Feb’20 (v/s
13.6% in Jan’20), largely in line with our estimate of 10.3%. Within food, vegetables – the main factor driving inflation
higher – inflation eased to 31.6% in Feb’20 from 50.0% a month ago.
Worryingly though, inflation in non-food items inched up in Feb’20. Inflation in ‘pan, tobacco and intoxicants’ and ‘fuel
and light’ and ‘clothing and footwear’ moved higher, while that in ‘housing’ remained flat. Thus, inflation excluding
food was up marginally to 4.0% in Feb’20 from 3.9% in Jan’20. Core inflation came in at 4.1% v/s 4.2% in Jan’20.
Index of Industrial Production (IIP) rose 2.0% YoY in Jan’20 versus +0.1% YoY a month ago and +1.6% YoY in Jan’19. The
number is higher than our estimate of 1.3% and consensus of 0.5%. The rise in industrial production was entirely
attributable to higher manufacturing activity. According to the use-based classification, production of intermediate
goods drove better IIP growth, while capital goods production continued declining, albeit at a slower rate.
Although inflation moderated in Feb’20, CPI inflation is likely to remain more than 5% till Oct’20, partly due to (a) base
effect and (b) elevated inflation in non-food items. As industrial production too rose faster in Jan’20, the combination of
moderating inflation and better growth imply that the RBI may not cut policy rates next month in its first monetary
policy meeting for FY21.
I. Retail inflation moderates after six months of uptrend
CPI inflation cools off in Feb’20…:
CPI-based retail inflation cooled off to 6.6% in
Feb’20 (v/s 7.6% in Jan’20) after trending higher for six months (Exhibit 1). The
number was slightly lower than consensus of 6.7% but higher than our estimate
of 6.3%.
…led by moderation in food inflation:
As expected, food inflation continued
moderating in Feb’20. CPI inflation in food came in at 10.8% in Feb’20 (v/s 13.6%
in Jan’20), largely in line with our estimate of 10.3%. Within food, vegetables –
the main factor driving inflation higher –inflation eased to 31.6% (v/s our
expectation of 29.2%) in Feb’20 from 50.0% a month ago
(Exhibit 2).
Additionally, inflation in other major food items such as ‘cereals and products’,
‘pulses and products’, ‘eggs’, ‘meat and fish’, ‘fruits’ and ’sugar and
confectionary’ moderated during the month. These items (incl. vegetables)
account for ~27% of the CPI basket. Worryingly though inflation in non-food
items inched up in Feb’20. Inflation in ‘pan, tobacco and intoxicants’ rose to
4.1% (v/s 3.7% in Jan’20), while that in ‘fuel and light’ inched up to a 15-month
high of 6.4%. Although ‘housing’ inflation remained flat at 4.2% in Feb’20,
‘clothing and footwear’ inflation rose to an 11-month high of 2.1%. Therefore,
inflation excluding food rose marginally to 4.0% in Feb’20 from 3.9% in Jan’20.
Core inflation tad lower due to miscellaneous items:
As against our expectation
of unchanged core inflation, the actual number came in at 4.1% in Feb’20
compared to 4.2% a month ago. This was largely due to a minor fall in
‘miscellaneous’ items inflation from 4.8% in Jan’20 to 4.5% in Feb’20. What
drove lower inflation here were two items—‘transport and communication’ and
‘personal care and effects’.
Nikhil Gupta – Research Analyst
(Nikhil.Gupta@MotilalOswal.com); +91 22 6129 1555
Yaswi Agarwal
– Research Analyst
(Yaswi.Agarwal@motilaloswal.com); +91 22 7193 4196
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
 Motilal Oswal Financial Services
Inflation in ‘core services’ flat:
Inflation in ‘core services’ remained unchanged at
4.6% in Feb’20 (Exhibit 4). This was because higher inflation in ‘health’,
‘household’ and ‘education’ services was offset by flat inflation in ‘transport and
communication’ and ‘recreation’ services.
Do not expect rate cut next month:
Although inflation moderated in Feb’20, CPI
inflation is likely to remain more than 5% till Oct’20, partly due to (a) base effect
and (b) elevated inflation in non-food items. As industrial production too rose
faster in Jan’20, the combination of moderating inflation and better growth imply
that the RBI may not cut policy rates next month in its first monetary policy
meeting for FY21.
Exhibit 2: …due to lower inflation in vegetables
Cereals & products
Pulses & products
Sugar & products
Vegetable
Other 'food & beverages'
Pan, tobacco & intoxicants
Fuel & light
Housing
Clothing & footwear
Fuel for vehicles
Exhibit 1: Retail inflation moderated to 6.6% in Feb’20…
8
7
6
5
4
3
2
1
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
4.1
Headline CPI
(% YoY)
6.6
Core CPI*
(1.07)
(0.00)
(0.00)
(0.00)
(pp)
0.00
0.01
0.18
0.01
0.01
(0.00)
(0.06)
Other 'Miscellaneous' items
* ‘Housing’, ‘Clothing and footwear’ and ‘miscellaneous’
Source: Central Statistics Office (CSO), MOFSL
Exhibit 3: Core CPI* too moderated slightly in Feb’20…
7
6
5
4
3
2
4.1
4.0
Core CPI*
(% YoY)
CPI excl Food
Exhibit 4: …and inflation in ‘core services’ remained flat
10
8
6
4
2
0
Feb-18
Aug-18
Feb-19
Aug-19
Feb-20
Housing
(% YoY)
Core services
Goods
7.3
4.6
4.2
* ‘Housing’, ‘Clothing and footwear’ and ‘miscellaneous’
Source: CSO, MOFSL
FY19
3.4
0.7
2.1
(8.3)
4.0
1.8
(2.8)
6.2
5.7
6.7
4.1
5.9
5.2
5.8
Feb-19
2.6
(0.0)
1.3
(3.8)
5.9
0.9
(6.7)
5.5
1.2
5.1
2.7
6.0
3.1
5.3
Dec-19
7.4
12.2
4.4
15.4
9.6
4.4
42.0
3.4
0.7
4.3
1.5
4.2
5.0
3.8
Jan-20
7.6
11.8
5.3
16.7
10.6
5.6
35.4
3.7
3.7
4.2
1.9
4.7
6.2
4.2
Feb-20
6.6
9.4
5.2
16.6
10.2
6.0
22.4
4.1
6.4
4.2
2.0
4.5
5.2
4.1
Exhibit 5: CPI and key components (% YoY)
% YoY
Overall CPI
Food & beverages
Cereal & products
Pulses & products
Meat & fish
Milk & products
Fruits & vegetables
Pan, tobacco & intoxicants
Fuel & light
Housing
Clothing & footwear
Miscellaneous
Transport & communication
Core CPI#
FY17
4.5
4.4
4.2
9.3
5.6
4.1
(0.1)
6.8
3.3
5.2
5.0
4.5
3.0
4.7
FY18
3.6
2.2
3.5
(21.0)
3.2
4.1
5.5
6.9
5.8
6.5
4.7
3.7
2.7
4.5
# ‘Housing’, ‘Clothing and footwear’ and ‘miscellaneous’
12 March 2020
2
 Motilal Oswal Financial Services
II. IIP exceeds expectations in Jan’20
IIP rises to six-month high:
Index of Industrial Production (IIP) rose 2.0% YoY in
Jan’20 compared to +0.1% YoY a month ago and +1.6% YoY in the year ago
period (Exhibit
6).
The number is higher than our estimate of 1.3% and
consensus of 0.3%. Notably, IIP growth for Oct’19 has been revised to -6.6% YoY
from -4.0% YoY earlier, leading to a sharper decline of 1.6% for 3QFY20 (v/s
earlier stated 0.8% decline). The rise in industrial production in Jan’20 was
entirely attributable to higher manufacturing activity
(Exhibit 7).
Moreover, even
power generation grew faster in Jan’20 compared to Dec’19.
Growth primarily due to manufacturing sector:
Manufacturing (IIP weight:
~78%) activity rose 1.5% YoY in Jan’20 v/s a decline of 0.7% YoY a month ago
and growth of 1.3% YoY in the year-ago period. Additionally, power (IIP weight:
8%) generation grew for the first time in six months by 3.1% YoY in Jan’20.
However, mining (IIP weight: 14%) activity grew slower at 4.4% YoY in Jan’20 v/s
+5.7% a month ago
(Exhibit 9).
Interestingly, items such as tobacco products,
textiles, wearing apparel, chemicals and pharmaceuticals grew faster in Jan’20.
Growth in basic metals (highest-weight items within manufacturing) remained
flat in Jan’20
(Exhibit 8).
Improved intermediate goods production supported IIP growth:
According to
the use-based classification, production of intermediate goods increased 15.8%
YoY in Jan’20 v/s growth of 13.3% a month ago and a decline of 2.8% in the year-
ago period. Capital goods production continued declining, albeit slower this
month. Other categories such as consumer durables and
infrastructure/construction too posted their second/sixth consecutive decline in
Jan’20. Growth in primary goods production slowed to 1.8% in Jan’20 from 2.4%
a month ago
(Exhibit 10).
Expect average IIP growth of ~2% in 4QFY20:
Considering the performance in
Jan’20, IIP growth is expected to average ~2.1% in 4QFY20 v/s a decline in the
previous quarter.
Exhibit 7: …due to better manufacturing activity
Mining
1.6
2.7 3.2
0.2
Manufacturing
4.5
4.9
1.3
-1.4
-4.6
-6.6
Electricity
1.8
0.1
IIP
2.0
Exhibit 6: IIP rose to six-month high in Jan’20 …
12.0
(% YoY)
IIP growth
9.0 7.5
7.0
5.3
6.0
3.8
3.0
0.0
-3.0
-6.0
-9.0
4.6
0.2
1.6
3.2
1.3
-1.4
-4.6
1.8 2.0
0.1
-6.6
Jan-18 May-18 Sep-18
Jan-19 May-19 Sep-19
Jan-20
Jan/19
Mar/19 May/19
Jul/19
Sep/19
Nov/19
Jan/20
Source: CSO, MOFSL
Source: CSO, MOFSL
12 March 2020
3
 Motilal Oswal Financial Services
Exhibit 8: Better intermediate goods output led IIP growth
25
20
15
10
5
0
-5
-10
-15
-20
-25
Primary
Consumer
Capital
Infra/cons
Intermediate
Exhibit 9: 15 sub-industries within manufacturing did better
100
80
60
40
20
(%)
< last year
<0%
< 5%
Jan/19 Mar/19 May/19 Jul/19
Sep/19 Nov/19 Jan/20
Source: CSO, MOFSL
0
Jan-19 Mar-19 May-19 Jul-19
Sep-19 Nov-19 Jan-20
Source: CSO, MOFSL
Exhibit 10:
Key components of IIP
% Y-o-Y
Industry-based classification
Mining
Manufacturing
Electricity
IIP
Use-based classification
Primary goods
Capital Goods
Intermediate Goods
Infrastructure/Construction
Consumer Goods
Durable Goods
Non-Durable Goods
Weight
14.4
77.6
8.0
100.0
34.0
8.2
17.2
12.3
28.2
12.8
15.3
FY17
5.3
4.3
5.8
4.6
4.9
3.2
3.3
3.9
5.7
3.0
8.0
FY18
2.3
4.7
5.3
4.4
3.7
4.0
2.3
5.6
6.2
0.8
10.5
FY19
2.8
3.8
5.2
3.8
3.5
2.7
0.9
7.3
4.6
5.5
4.0
Jan-19
3.8
1.3
0.9
1.6
1.4
(3.6)
(2.8)
6.4
3.3
2.5
3.8
Nov-19
1.8
2.7
(5.0)
1.8
(0.3)
(8.2)
16.5
(2.4)
0.3
(1.6)
1.5
Dec-19
5.7
(0.7)
(0.1)
0.1
Jan-20
4.4
1.5
3.1
2.0
2.4
1.8
(18.0)
(4.3)
13.3
15.8
(2.1)
(2.2)
(4.5)
(1.8)
(5.4)
(4.0)
(3.9)
(0.3)
Source: CSO, MOFSL
12 March 2020
4
 Motilal Oswal Financial Services
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5
 Motilal Oswal Financial Services
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to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses,
costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263; Website
www.motilaloswal.com.
CIN No.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road, Malad(West), Mumbai- 400 064. Tel No: 022
7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst: INH000000412. AMFI:
ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579 ;PMS:INP000006712. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration
No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.:
INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is a distributor of Mutual Funds, PMS, Fixed Deposit, Bond,
NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. which is a group company of MOFSL. Private Equity is offered
through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL. Research & Advisory services is backed by proper research. Please read the Risk
Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no assurance or guarantee of the returns. Investment in securities market is subject to market risk,
read all the related documents carefully before investing. Details of Compliance Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOFSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National Company
Law Tribunal, Mumbai Bench.
12 March 2020
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