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CPI inflation at four-month high in Mar’21; IIP contracts faster in Feb’21

Base effect may drive CPI lower and IIP higher going forward

* CPI-based retail inflation came in at a four-month high of 5.5% YoY in Mar’21 (v/s 5% in Feb’21 and 5.8% in Mar’20). This number is marginally higher than both our forecast and market consensus of 5.4%. With this, CPI inflation in FY21 came in at 6.2%, a seven-year high.

* The higher inflation was primarily attributable to higher food inflation (CPI weight: 39%), which also came in at a fourmonth high of 4.9% YoY in Mar’21. Worryingly, though, CPI inflation excluding food rose to a 29-month high of 5.9% YoY in Feb’21 (from 5.8% YoY in Jan’21).

* Inflation in core items (housing, clothing and footwear, and miscellaneous items – CPI weight: 44.9%) rose to a 27- month high of 5.7% YoY in Mar’21, from 5.3% in Feb’21, on account of higher inflation in all of its components. Within miscellaneous items – education, recreation and amusement, transport and communication, and household goods registered higher inflation in Mar’21 vis-à-vis Feb’21.

* Additionally, IIP declined 3.6% YoY in Feb’21 v/s a fall of 0.9% YoY in Jan’21. The number was worse than both our expectation and market consensus of (-)3% YoY in Feb’21. Notably, IIP numbers for Nov’20/Jan’21 were revised from - 2.1%/-1.6% to -1.6%/-0.9% YoY.

* While both manufacturing (IIP weight: ~78%) and mining activity (IIP weight: ~14.4%) declined in Feb’21, power generation continued to grow (albeit moderately) in Feb’21. According to use-based classification, the production of capital goods and infrastructure/construction activity declined in Feb’21. However, the production of consumer goods was up 0.2% YoY in Feb’21, against decline of 3.3% YoY in Jan’21.

* Overall, there were no surprises in the spike in CPI inflation / fall in IIP data in Mar’21/Feb’21. We expect CPI to ease to less than 5% in Apr’21 and IIP to grow ~20% in Mar’21, primarily led by the very low bases of Apr’20 and Mar’20. On an annual basis, we expect CPI to average 4.7% YoY in FY22 (v/s 6.2% YoY in FY21) and IIP to grow 11% YoY in FY22 (v/s expected decline of 8.7% YoY in FY21).

I. Retail inflation at four-month high in Mar’21

* CPI inflation higher than expected…: CPI-based retail inflation came in at a fourmonth high of 5.5% YoY in Mar’21 (v/s 5% in Feb’21 and 5.8% in Mar’20). This number is higher than both our forecast and market consensus of 5.4% (Exhibit 1). With this, CPI inflation in FY21 came in at 6.2%, a seven-year high (Exhibit 2).

* …due to rise in food inflation: Food inflation (CPI weight: 39.1%) came in at a four-month high of 4.9% YoY in Mar’21, against 3.9% YoY in Feb’21 and 8.8% YoY in Mar’20 (Exhibits 3, 4). More worryingly, CPI excluding food came in at a 29-month high of 5.9% YoY in Feb’21. Within food, inflation in items such as ‘pulses and products, ‘oil and fats, ‘meat and fish’, and ‘fruits’ rose in Mar’21 visà-vis Feb’21. Other items such as ‘cereals and products’, ’eggs’, ’milk and products’, ‘spices’, ‘vegetables’, and ‘sugar and confectionary’ – accounting for ~27% weight in CPI – actually exhibited lower inflation or continued in the deflationary zone in Mar’21. Additionally, fuel and light inflation also rose to a one-year high of 4.5% YoY in Mar’21 v/s 3.5% YoY in Feb’21.

* Core inflation up to 5.7% YoY in Mar’21: Inflation in core items (housing, clothing and footwear, and miscellaneous items – CPI weight: 44.9%) rose to a 27-month high of 5.7% YoY in Mar’21, from 5.3% in Feb’21, on account of higher inflation in all of its components (Exhibit 5). Within Miscellaneous items, education, recreation and amusement, transport and communication, and household goods registered higher inflation in Mar’21 v/s Feb’21.

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