It was a week of key macro data announcements. The week saw key data points being announced on inflation (both retail and wholesale), IIP growth and the trade data. There are some interesting signals coming from data.
What’s the inflation message?
CPI inflation has come under pressure in the month of May. The CPI inflation for May came in higher at 3.07%. Also, the inflation number for April was upgraded from 2.92% to 2.99%. If one were to look at the overall basket of inflation, then the real pressure came from the food items. In fact, food inflation went up from 1.15% to 1.83% which really added heft to the overall CPI inflation. This is important because this has happened at a time when core inflation has actually been on a consistent down trend. The big pressure for inflation came from food and oil, with oil having strong externalities for other sectors too. While the CPI inflation is still well within the RBI target of 4%, there is room for caution because food inflation is higher and IMD has predicted a weak monsoon this year. That could only add to the pressure on food items. What is ironic is that the CPI inflation has been at a 7 month high but WPI inflation actually came in lower. It implies that while inflation is going up, the benefits are not reaching producers and farmers. A higher inflation could also mean a possible rethink of the Monetary Policy Committee strategy to cut rates further.
IIP shows traction
The index of industrial production saw some positive traction for the month of April with YOY IIP growth coming in at 3.6%. This is a big improvement over the negative growth seen in the month of March. For the full year, the IIP growth was closer to 3.4%, which is relatively lower than the average growth in the last 10 years. But the good news on the IIP front is that the growth has been uniformly positive in all the three principal segments of IIP viz. Mining, Manufacturing and Electricity. What is also visible in the IIP numbers is that the there appear to be green shoots of recovery in the capital investment cycle and that is something that markets have been betting for long.
Trade deficit widens
On the macro front, there was not much respite on the trade account. Trade deficit for May widened to $15.36 billion even as the exports grew at a tepid rate of just 3.3%. While non-oil imports were up by just 2.9%, the oil imports saw a spurt of 8.4% on the back of higher import volumes and a higher average price. Trade deficit continues to hint at closer to $200 billion for the full year and that could put pressure on the value of the rupee. Also the message here is to balance our oil imports as any geo-political risk in the Middle East could create a short term challenge. That could be the key macro challenge! ©