Macro Message

What are India’s macros telling us?

During the last week there were quite a few interesting data points that were announced. CPI, IIP and WPI came out during the week. What do these indicators hint at?

CPI and WPI are headed up…

 The CPI or retail inflation came in at 5.61% for December, higher than the previous month by 20 bps. This was on expected lines but it is a cause of concern as the CPI nears the comfort level of 6%. Of course, there is the comfort of weak oil prices but the real pressure is coming from food inflation. The WPI number for December was announced a couple of days after the CPI. WPI number came in at -0.73%. In fact, this is the 14th consecutive month that the WPI has been in negative territory. The WPI moving closer towards the Zero mark is a good sign that the Indian economy is not caught in the fangs of deflation since it has other negative consequences. WPI has been negative due to weak commodity prices and high levels of indirect taxes. But this could slacken back deeper into negative territory if food inflation is brought under control. That will be a challenge for the RBI.

The IIP disappointed…

To a large extent, the IIP has been highly vulnerable to the base effect. After touching a high of 9.8% in October, the IIP for November came in at a disappointing -3.2%. This was largely due to the core sector number disappointing for the month. The core sector accounts for nearly 37% of the IIP and has a magnified effect on the IIP. The IIP also has larger implications for GDP and corporate profits.

What will be the ramifications?

Typically, policy makers tend to look at data over a longer period of time than at a point of time. However a few quick takeaways can be culled out here. Firstly, if the CPI inflation continued to be closer to the range of 6%, then the leeway that the RBI has in cutting rates further will be limited. Secondly, the weak IIP numbers may be a case for an RBI rate cut. But the RBI can always argue that while the central bank can signal rates, the transmission has to happen at the bank level. That is currently not happening. Lastly, the WPI getting closer to zero is a clear sign that India is not getting into deflation. That is good news at a time when India is trying to grow at a clip of nearly 8%, much faster than other large economies.

IIP growth has another important ramification. It is crucial to GDP growth and a lower GDP growth will lead to a higher Fiscal Deficit and CAD as a proportion of GDP. That is not too positive for ratings. The message is clear. Control inflation and push growth, without forsaking fiscal prudence. That will be the challenge for the FM! ©

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