CPI, IIP numbers today; Is a scare in the offing or will RBI status quo call generate good news?

The Central Statistics Office (CSO) will be presenting data on two economic indicators today at around 17:30 hours. These indicators are India’s Industrial Production (IIP) for the month of August 2018, while the Consumer Price Index (CPI) inflation numbers will be for the month of September 2018. Investors are keeping a close eye on the performance of inflation after RBI’s October 2018 policy, where the central bank opted for a status quo keeping the repo rate unchanged at 6.50%. Ahead of the announcement, markets are performing on a positive note, with Sensex trading at 34,722.80 above by 721.65 points or 2.12%, while Nifty 50 is higher by 228.40 points or 2.23% trading at 10,463.05 at around 12:59 hours. 

CPI or retail inflation

It would be interesting to know whether RBI’s status quo decision pays dividend, considering it stood firm on its inflation target goal, as CPI eased to 3.69% during the month of August 2018, lower compared to 4.17% in the previous month. While  core CPI inflation (ex. Food and fuel) also eased slightly to 5.8% Y-o-Y from 6.2% Y-o-Y in July. 

RBI has lowered its CPI inflation target at 4.0% in Q2:2018-19, 3.9-4.5% in H2 and 4.8% in Q1:2019-20, with risks somewhat to the upside. 

With this, CPI inflation has decelerated to a 10-month low in August. Interestingly, looks like analysts feel RBI’s easing of inflation target may prove to be wrong. 

source: tradingeconomics.com

Teresa John, Economist at Nirmal Bang, said, “CPI inflation in September 2018 is likely to come in at 4.47% YoY, up from 3.7% in the previous month. Food prices remain largely muted, but on YoY basis, food and beverage inflation is likely to rise from 0.85%YoY in August 2018 to 2.39%YoY on a low base.”

Similar opinions were from PhillipCapital analysts. They said, “While August inflation is favourable, it will jump in the coming months owing to higher oil prices and imported inflation. This along with weakening Rupee would lead to RBI tightening rates; we expect 25‐50bps hike in rest of FY19.”

Edelweiss Investment Research said, “We expect consumer price inflation to head higher from September onwards and rise towards mid five percent range in the coming months. The deteriorating fiscal position of the government on the back of pre-election spending and shortfall in GST collections may be a big risk. Also, household inflation expectations as measured by the RBI have been continuously rising in the last two rounds.”

Antique Broking firm said, “Our estimate for CPI is also of a spike in early 3QFY19 (~5.1% in Oct'18) with multiple variables which can affect the trajectory including crude oil prices and INR volatility. Despite a sub 4% reading for the month of Aug'18, RBI is likely to focus on the risks ahead and thus a rate hike is very likely in the October policy.”

Finally, ICICI Bank said, “We expect FY2019 headline CPI inflation to average ~4.7% with core inflation averaging 5.8%. Upside risks to the trajectory remain on account of the following factors- 1) Continued input cost pressures and closing of the output gap putting upward pressures on core 2) fears of food inflation (driven by MSP increases) feeding into inflationary expectations and 3) volatility in the Rupee feeding into fuel prices and second round impact of the depreciation.” 

IIP or factory output

India's industrial production (IIP) or factory output for the month of July 2018 came in at 6.6% which was slightly lower compared to 6.9% recorded in previous month. However, this was higher compared to the level in the month of July 2017. The quick estimates of IIP with base 2011-12 for the month of July 2018 stands at 125.8. 

IIP at 6.6% was on lower base. Manufacturing, consumer durables, and infrastructure goods fared well. Sectors that recorded decent growth – beverages, pharma, computers & electronics, automobiles, and furniture. Chemicals, paper, tobacco products, and metals were muted.  

source: tradingeconomics.com
Talking about IIP for August month, John said, “IIP growth for August 2018 is likely to slow to 3.3% YoY from 6.6% in the previous month. August 2018 manufacturing PMI softened to 51.7 from 52.3 in the previous month before rising to 52.2 in September 2018.”

John explains, Core infrastructure industries also slowed to 4.1% in August 2018 from 7.3% in the previous month. Within core infrastructure industries, mining sector was sluggish. Coal production rose 2.5%YoY in August 2018, down from 9.7% in the previous month. Natural gas production rose 1% YoY after a 5.1% decline in the previous month. Electricity production grew 5.4%YoY in August 2018, down from 6.7% in the previous month.

Edelweiss says, “The next few data points could be volatile as the economy transitions a volatile base, delay in onset of the festival season as compared to last year, effects of INR depreciation and a more aggressive RBI. To be sure some stability is already been seen in export driven sectors like apparels but the growth at 9.8% YoY is still subdued despite a very favourable base.”