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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.