Macro data worry

CPI disappoints on the upside; IIP growth on the downside…

The macro numbers that came out this week were disappointing in more ways than one. To begin with, the inflation number at 5% was much higher than expected. It was not only higher than the previous month, but also much higher than the consensus estimates. On the other hand, growth in IIP (Index of Industrial Production) came in at a mere 3.7%, much lower than expectations. These data points could be quite critical from a regulatory standpoint. Let us understand how!

Food inflation is back…

Inflation was always going to be higher once the base effect had started waning. Dr. Rajan had already warned in his previous credit policies that the real picture of inflation may emerge only from November onwards. The inflation for the last month is already at 5% and is pretty close to the long term average estimate of 5.5% put out by the RBI. Hence the leeway for inflation from these levels is quite limited.

Inflation during the month was largely driven by food inflation, where we saw a sharp increase in the prices of lentils. Over the last few weeks, the governments at the centre and the states have been fighting an uphill battle against hoarders of pulses to bring the price back to rational levels. While a semblance of control seems to be returning to food inflation, it continues to be a tinderbox which could flare up any time.

IIP is too erratic for comfort…

The erratic nature of IIP is another major cause for worry for the government. The India story is now predicated on the ability to sustain growth at closer to 8% over the next 3 years. Since IIP is an important constituent of GDP growth, pressure on GDP is likely to be visible. If the number slips closer to 7% then it could have negative repercussions for Indian as an investment destination.

The downslide in IIP during the last month was largely driven by mining. But the real worry has been the erratic nature of the IIP over the past few months that is beginning to raise doubts over the GDP target.

What it means for policy?

In simple language this data means that the RBI will not be cutting rates in December. Rajan will be keen to ensure that inflation stays within the RBI comfort zone and hence a rate cut is virtually ruled out. Also as the Fed gets closer to a rate hike in December, the RBI will want to ensure that Indian rates are attractive enough for debt inflows. A rate cut was anyway a remote possibility in December. The inflation data has only underscored the need to hold rates. ©

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