Much-needed relief from the CPI and IIP numbers…

There was the much needed relief from the CPI and the IIP numbers that were announced on 12th August. The index of industrial production (IIP) for June 2015 came in at an encouraging 3.8%, a sharp uptick from the 2.5% previously. Similarly, retail inflation for July 2015, as measured by the Consumer Price Index (CPI) fell to 3.8% as against a high of 5.4% last month. On balance, the IIP was above consensus estimates while the CPI was below the consensus estimates giving the much needed relief to the Indian economy; at a time when it has been racked by two rounds of devaluation of the Chinese Yuan.

Breaking up the IIP growth story…

Within the overall growth of 3.78% for the month of June, there seem to be a number of sub-texts in the story. Manufacturing growth showed the 8th consecutive month of growth and was up 4.6%. This largely contributed to a better performance of the IIP as a whole. This sustained performance can be seen as green-shoots of an economic recovery, although it will also be contingent on factors like bank credit, industrial demand etc. The consumer durables segment, led by automobiles, has also been an overall outperformer within the IIP sub-text. However, the consumer non-durables segment has under-performed. Thus these numbers cannot be taken as a veritable proof of any kind of pick-up in consumer demand.

Breaking up the CPI (inflation) story…

Inflation at 3.8% is at an 8-month low and that is encouraging. Of course, as mentioned by the RBI governor, this could be largely due to the base effect which is extremely pronounced in the months of July and August this year. The biggest contributor to lower inflation was food inflation. Fairly reasonable monsoons have been responsible for the moderating of food prices across India. However, the government decision to clamp down heavily on prices of cereals seems to have worked. Even in case of pulses, the inflation was kept in check as the government allowed imports to tame prices within India.

What it means for rate policy?

The logical question is what does it mean for RBI’s rate policy? Will it spur the RBI to cut rates? Not necessarily. The next round of rate hike may be decided by factors outside of domestic inflation and IIP growth. The RBI needs to be first convinced that the fall in inflation is not due to the base effect alone. That will become clear only in September. Fed decision on rates will be critical input for the RBI to decide on its future rate decision. But the real joker in the pack could be the sudden decision by China to devalue the Chinese Yuan. A cheap Yuan makes the rupee cheaper against the US dollar. To prevent a panic outflow of portfolio flows, the RBI may be inclined to raise the FII debt limits and keep rates constant to encourage portfolio inflows. In the next policy meeting, these considerations may weigh on the RBI; more than IIP or CPI. That is, of course, not to take away from the fact that the Indian economy surely has reasons to celebrate on the growth and inflation front!

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