The data on the Consumer Price Index (CPI) and Index of Industrial Production (IIP) have raised some concerns over the India growth story during this week. Inflation was above expectations and IIP was lower than anticipated. More than the numbers, it is the components that raise some serious concerns about growth and inflation. Let me explain!
CPI is up to 5.37% …
The CPI number came in at 5.37% in February versus 5.19% in January 2015. This higher CPI was largely driven by the food component. There are two key points to note here. Firstly, higher food prices were responsible for higher inflation. This was largely an outcome of unseasonal rains which had a negative impact on the Rabi crop. With unseasonal rains likely to continue, as per Met forecasts, this situation could worsen. Secondly, the Rs.3 hike in petrol and diesel prices will also show up next month. Something for the government to really worry about!
IIP lower at 2.6%
You could call it a double whammy! If higher inflation was one cause of concern, the other cause of concern was lower IIP. Normally a lower growth rate combined with higher inflation raises doubts over the genuineness of an economic recovery. According to data released by the Central Statistical Organization (CSO), IIP for January 2015 came in at 2.6% as against 3.2% (revised) in the previous month. The break-up of this figure is also slightly disconcerting. Manufacturing has shown a growth of a mere 3.3%, while consumer durables are actually down by 5.3%. This essentially indicates an extremely fragile consumer sentiment. The only redeeming feature was that there was a 12.8% growth in capital goods; a lead indicator that economic activity could start picking up. In fact, out of the 22 subsectors of manufacturing IIP, 7 sectors shrank. One only hopes this figure is not out of sync with the 7.5% GDP estimate.
What is the bottom-line?
The biggest question is whether this data will impact the rate cut cycle in India. The RBI has cut repo rates in two rounds of 25 basis points each; once in January and once in March this year. But Dr. Rajan has also reiterated that rate cuts will be contingent on low inflation being sustained. With concerns on the fuel front as well as the food inflation front, markets may have to prepare for a monetary policy without rate cuts in April 2015. That could be a concern for industry and stock markets.
The RBI has a thin line to walk. Choosing between growth and capital flows is never an easy decision. The latest data on consumer price inflation (CPI) and the IIP may have just added a new dimension to the rate debate! ©