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Inflation further eases; industrial growth dims
* IIP contracted to 17-month low of 0.5% in Nov v/s 8.4% in Oct and 8.5% in Nov’17 Manufacturing contracted by (-)0.4% in Nov. 13 out of 23 industry group showed negative growth during the month
* Output of mining and electricity sectors also eased to 2.7% and 5.1% in Nov v/s 7.1% and 8.2% in Oct
* Manufacturing PMI which recorded at 53.2 in Dec still indicates buoyant sentiments
* Capital goods lost momentum in Nov and contracted by (-)3.4% (17.0% in Oct). Contraction in govt related capex weighed on sector performance
* CPI Inflation eased to 18-month low of 2.2% in Dec v/s 2.3% in Nov
* Decline in inflation was driven by persistent decline in food prices and latest reduction in crude oil prices
* Core inflation continue to remain sticky
* RBI is expected to change its stance from ‘calibrated tightening’ to ‘neutral’ in the next monetary policy. While the apex bank will await more data on core inflation before taking decision of policy rate cut.
Industrial growth contracts to 17-month low of 0.5% in Nov
Indian industrial production (IIP) unexpectedly declined to 17-month low of 0.5% in the month of Nov v/s 8.4% in Oct’18 and 8.5% in the same month of previous year. Sharp decline in the factory output can be attributed to post festival demand check, impact of liquidity crunches in economy and unfavorable base effect. The output of manufacturing sector which accounts for ~78% of IIP contracted by (-)0.4% in Nov (8.2% in Oct and 10.4% in Nov’17) and 13 out of 23 industry group showed negative growth. Output of mining and electricity sectors also eased to 2.7% and 5.1% during the month under review v/s 7.1% and 8.2% in the previous month. On use based classification, most of the broad sectors showed contraction. Consumer goods sector contracted in Dec mainly due to sluggish urban demand owing to post festival contraction in demand, lagging effect of high crude oil prices as well as liquidity crunches. Capital goods sector lost momentum in Nov and contracted by (-)3.4% (17.0% in Oct) owing to the contraction in govt related capex. Growth in infrastructure sector also slowed down to 5.0% in Nov (8.9% in Oct and 13.7% in Nov’17).
CPI inflation eases to 18-month low of 2.2% in Dec
CPI Inflation or retail inflation eased to 18-month low of 2.2% in Dec v/s 2.3% in Nov and 5.2% in the same month of previous fiscal. Persistent decline in food prices and latest decline crude oil prices put downward pressure on headline inflation. However, core inflation continued to remain sticky (5.7% in Dec v/s 5.7% in Nov) owing to higher prices of some services items. Consumer Food Price Index (CFPI), which represents 47.25% weight in the index, reported at (-)2.5% in Dec v/s (-)2.6% in Nov due to deflationary trend witnessing in key food items include vegetables (-16.1% in Dec v/s -15.6% in Nov), pulses (-7.1% in Dec v/s - 9.2% in Nov) and fruits (-1.4% in Dec v/s 0.2% in Nov). Owing to decline in crude oil prices in Dec to $50 per barrel, fuel inflation also eased to 4.5% in Dec v/s 7.2% in Nov.
Industrial production growth lost momentum in Nov with the contraction in the output of manufacturing sector. Decline in NBFCs lending and high crude oil prices have impacted largely the urban demand. Output of capital goods and infrastructure sectors are likely to remain modest given the govt’s tight fiscal position. Meanwhile, manufacturing PMI which recorded at 53.2 in Dec still indicates buoyant sentiments additionally, the improving liquidity situation and election related spending could boost spending in the near term.
Food inflation index witnessed deflation for the third consecutive month in Dec. Vegetables and pulses were within the deflationary trend over the past many months. With the anticipation of adequate food items supply and easing crude oil prices, food and fuel inflation are likely to remain low. However, continued stickiness in core inflation raised concerns over the durability of low inflation. Thereby we believe that the RBI would change its stance from ‘calibrated tightening’ to ‘neutral’ in the next monetary policy. While, the apex bank will await more data on core inflation before taking decision of policy rate cut.
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