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CPI inflation at 16-month low in Jan’21; IIP rises once again in Dec’20

Do not expect any change in policy stance

* CPI-based retail inflation came in at a 16-month low of 4.1% YoY in Jan’21 (v/s 4.6% in Dec’20 and 7.6% in Jan’20). This was lower than both our forecast of 4.3% and the market consensus of 4.4%.

* Food inflation came in at a 20-month low of 1.9% YoY in Jan’21 (v/s 3.5% in Dec’20) due to more-than-two-year-high deflation of 15.8% YoY in ‘Vegetables’ in Jan’21 (v/s inflation of 50% in Jan’20). In fact, inflation in other major food items – such as ‘Cereals and Products’, ‘Pulses and Products’, and ‘Milk and Products’ – also moderated considerably in Jan’21.

* Inflation in core items (Housing, Clothing and Footwear, and Miscellaneous Items) remained unchanged at 5.3% YoY in Jan’21. Within Miscellaneous Items, Education, Personal Care and Effects, and Household Goods and Services exhibited lower inflation in Jan’21 v/s Dec’20.

* Separately, IIP edged up 1% YoY in Dec’20 (v/s decline of 2.1% YoY in Nov’20 and 0.4% growth in Dec’19). This was contrary to the market consensus of decline of 0.2% YoY, but in-line with our expectation of +1.3% YoY in Dec’20.

* While Manufacturing activity grew at 1.6% YoY in Dec’20 (v/s decline of 2% YoY in Nov’20), Power Generation posted growth of 5.1% YoY in Dec’20 (v/s 3.5% YoY in Nov’20). Mining activity, however, continued to decline, albeit slower in Dec’20. Moreover, according to use-based classification, production in Capital Goods was up 60 basis points in Dec’20 (after contracting 7.4% YoY in Nov’20) and that in Consumer Goods also grew 3.1% YoY in Dec’20 (v/s a contraction of 2.2% in Nov’20).

* With actual IIP numbers, our monthly EAI-GVA for Dec’20 now stands revised, indicating growth of 4% (from 3.9% earlier). Overall, although core inflation remaining sticky calls for some vigilance, headline inflation being close to the RBI’s medium-term target of 4% is certainly a good sign. Therefore, the RBI’s continued guidance to focus on growth – while ensuring headline inflation remains in check – suggests a rate cut is unlikely in the near future.

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