Below are Views On CPI rises to 5.03% but no sign of panic By Mr. Krupesh Thakkar, CFA, Asst. Professor and Head of Department - Financial Markets, ITM B-School
Expect RBI’s accommodative stance to continue after stable CPI and support seeking IIP numbers
CPI rises to 5.03% but no sign of panic
As expected, the CPI for the month of February 2021 has rose to 5.03% after subsiding for last two months. The CPI stood at 4.06 % in January 2021 and 6.58% in February 2020. On month-on-month (m-o-m), basis the rise is of only 0.2%.
The unfavourable (lower) base impact has played its role, resulting in higher CPI as the CPI fell by 0.7% in the same period last month. This is more evident in food price index which in-spite falling by 0.4% on m-o-m basis, has shown yearly increase of 4.25%.
The main cause of concern is still the fuel inflation which is continuously is heading for north pole. The persistent rise in prices of petrol, diesel and LPG is fueling the inflation as evident from its numbers with the fuel, light index going up by 1.5% on m-o-m basis.
The core inflation (excluding food items and fuel) came at 5.9% vs 5.7% in January 2021 is a bit on higher side. There has been discussion of giving importance to the core inflation by RBI rather than the headline CPI as later is more fluctuating owing to food price and fuel inflation. Even the Economic Survey 2021-22 has raised the issue. The more discussion on the appropriate inflation measure for policy decisions can be left some other time.
IIP contracts slightly but no major worry
The Index of Industrial Production – IIP has contracted in January 2021 by 1.6% after rising for 2 months. Though the yearly figures for all sector – Mining, Manufacturing and Electricity have contracted, the monthly rise has been witnessed in mining (3.4%) and electricity (3.9%). These can also be seen as leading indicator for future bright numbers in manufacturing going ahead.
Eyes on RBI
Still, the CPI inflation is below the RBI’s projection of 5.2% for Q4FY22. Recently, RBI in its report on ‘Currency and Finance’ has favoured CPI band of 2% to 6% with tolerance band of +/- 200 bps. Looking at CPI and IIP numbers, the accommodative stance of RBI’s Monetary Policy Committee (in its’ next meet in early April 2021) is expected to continue with status quo on short term interest rates.
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