Monthly Macro Data – Some encouragement; some concerns…

Over the last 3 days, some key data points on the macro front have been announced. The IIP growth has come in at 9.8%, which is almost 350 basis points higher than what the markets were anticipating. On the other hand, the Consumer Price Index (CPI) inflation has risen to 5.41% from 5% last month. This is a major area of concern and will dissuade the RBI from reconsidering any further repo rate cuts till this number stabilizes to a more reasonable figure. Lastly, the Wholesale Price Index (WPI) inflation has come in at -1.99%, a sharp improvement from -3.81% last month. This again dispels fears that the Indian economy may be drifting towards deflation and that is the positive side of the story. Let us look at each of these macro parameters in greater detail.

CPI Inflation at 5.41% is surely a cause for worry…

The CPI inflation for the month of November 2015 came in higher at 5.41%. Last month it was 5% which was anyways considered as slightly disconcerting. The culprit was food inflation which quickened by 82 basis points to 6.07%. Food inflation has been quite sticky for some time. First it was onions, then it was pulses and finally it was tomatoes. Post September, we have seen the base effect waning and that has led to inflation getting back to more unpalatable levels. The biggest contributor within the food inflation basket was pulses. Despite the best efforts of the government, there has been little success in reining in the price of pulses.

The breakup of CPI inflation is quite disconcerting. Vegetable inflation has gone up from 2.42% to 4% in the last one month. During the same period, both rural and urban inflation are up by 42 basis points on a month-on-month basis. This number is relevant because any future decision on rate cuts by the RBI is largely going to predicate on this number. Unless the inflation comes well below the 5% mark, the RBI may not be too inclined to be liberal with further rate cuts.

 WPI Inflation at -1.91% is an encouraging sign…

The WPI inflation at -1.91% was almost 68 basis points higher than the consensus estimates. This trend is encouraging because the WPI inflation has been in negative territory for almost 13 months now and a trend that is moving towards Zero is an encouraging sign. When WPI inflation stays in negative territory for too long, it raises the spectre of deflation. That is a situation the government and RBI will want to avoid due to its implications for growth, incomes and jobs.

A large part of the negative WPI inflation can be attributed to the cheap price of commodities globally. Take the specific components of the WPI. Fuel inflation continues to be nearly 11.9% and it has a nearly 15% weightage in the WPI basket. That is the reason the WPI inflation has been in negative territory for the last 13 months since the oil price crash started globally. This improvement in the WPI figure to -1.91% was largely due to a better than expected performance by food articles which inflated at 2.3%. With the OPEC choosing to pump oil and maintain market share instead of price, the negative trend in WPI inflation is likely to continue. The commodity bust in industrial commodities like aluminium, copper, nickel and since will ensure that manufacturing inflation also remains subdued.

IIP at 9.8% was, probably, the icing on the cake…

The Index of Industrial Production (IIP) came in at an encouraging 9.8%. This was almost 350 basis points higher than consensus estimates and is likely to rekindle hopes of a bounce in GDP growth. This IIP number can also be interpreted as the green-shoot of a recovery in the overall corporate earnings cycle, although these may be early days still.

The IIP number was largely driven by a pick-up in consumer durables which grew by 42% in the month of October, which was reported on 11th December. Even Gems and Jewellery saw a growth of 372% but then its weightage is small and hence in the overall scheme of things it may not account for much. The other major growth stories were mobiles and accessories at 61%, scooters and mopeds at 24% and cars at 21%. Of course, there is also a base effect which needs to be factored into the October numbers. Experts fear that the November IIP numbers may not be so encouraging. If the momentum can be sustained for IIP, then the corporate sector can seriously look forward to some traction in earnings in the coming quarters.

In a nutshell, there is a positive growth story that is building up and that is good news for India Inc. However, the burgeoning inflation is a worry and especially food inflation needs to be curbed. Food inflation has the tendency to be sticky since in India they are caused more by supply bottlenecks rather than by excess demand. The government will have to address this area immediately. The RBI, of course, will be watching the CPI inflation number closely as future rate action will predicate on that. For the time being, all eyes will be on what Janet Yellen will be announcing on December 16th after the conclusion of the Fed meet.

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