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CPI inflation at 3-month low in Apr’21; IIP grew ~22% in Mar’21 on low base

RBI likely to remain accommodative this year

* CPI-based retail inflation came in at a three-month low of 4.3% YoY in Apr’21 (v/s 5.5% in Mar’21 and 7.2% in Apr’20). This number is lower than our forecast of 4.6% YoY and higher than Bloomberg consensus of 4.1% YoY.

* Food inflation (CPI weight: 39.1%) came in at a three-month low of 2% YoY in Apr’21 as against 11.7% YoY a year ago and 4.9% in Mar’21. While items such as ‘vegetable’, ‘sugar and confectionary’, ‘milk and products’ and ‘cereals and products’ registered deflation last month, inflation in other food items like ‘pulses and products’ and spices’ came in lower in Apr’21 compared to Mar’21. These items account for ~29% weight in CPI basket.

* Inflation in core items (Housing, Clothing and Footwear, and Miscellaneous Items – CPI weight: 44.9%) came in at a 10- month low of 5.2% YoY last month (v/s 5.8% YoY in Mar’21). Of the three items mentioned above, the latter two came in at four-month and 10-month lows, respectively. ‘Housing’ inflation rose to a 12-month high of 3.7% YoY in Apr’21.

* Additionally, IIP grew 22.4% YoY in Mar’21 supported by a low base. The number is in line with our expectations and higher than Bloomberg consensus of 20% YoY. With this, IIP in 4QFY21 stood at 12-quarter high of 5.3% YoY.

* While manufacturing activity and power generation grew in the range of 22-26% YoY in Mar’21, mining activity increased 6.1% YoY during the month. However, production of certain manufactured items such as food products, tobacco, print and record media and Coke & Refined Petroleum Products continued declining, albeit slower.

* According to use-based classification, production in Capital Goods, and infrastructure/construction and consumer goods production grew >30% YoY in Mar’21.

* We expect CPI inflation to inch higher to ~5% by Jun’21 before its eases to 3.5% by Nov’21. If so, it could average 4.5% YoY in FY22, following 6.2% in FY21. Additionally, although IIP growth could be ~35-40% in 1QFY22 as against a decline of 35.5% YoY in 1QFY21, it could grow 8-9% YoY in FY22, following a fall of 8.7% YoY in FY21.

* Overall, the data releases are unlikely to have any impact on the monetary policy. Considering the far worse second wave of COVID-19 cases, the RBI is likely to remain accommodative this year.

I. Retail inflation at 3-month low in Apr’21

* CPI inflation moderated in Apr’21…:

CPI-based retail inflation came in at a three-month low of 4.3% YoY in Apr’21 (v/s 5.5% in Mar’21 and 7.2% in Apr’20). This number is lower than our forecast of 4.6% YoY and higher than Bloomberg consensus of 4.1% YoY (Exhibit 1).

* …due to lower food inflation:

Food inflation (CPI weight: 39.1%) came in at a three-month low of 2% YoY in Apr’21 as against 11.7% YoY a year ago and 4.9% in Mar’21 (Exhibit 2). While items such as ‘vegetable’, ‘sugar and confectionary’, ‘milk and products’ and ‘cereals and products’ registered deflation last month, inflation in other food items like ‘pulses and products’ and spices’ came in lower in Apr’21 compared to Mar’21). These items account for ~29% weight in CPI basket. The remaining items (‘oil and fats’, ‘meat and fish and ‘fruits’) exhibited higher inflation last month compared to Mar’21. Consequently, CPI inflation excluding food came in marginally lower at 5.8% YoY in Apr’21 from 5.9% YoY in Mar’21 and similar to 5.8% in Feb’21.

* Core inflation at 10-month low in Apr’21…:

Inflation in core items (Housing, Clothing and Footwear, and Miscellaneous Items – CPI weight: 44.9%) came in at a 10-month low of 5.2% YoY last month as against 5.8% YoY in Mar’21 and 4.8% YoY in Apr’20 (Exhibit 3). Of the three items within core, ‘miscellaneous’ items and ‘clothing and footwear’ came in at 10-month and four-month low, respectively, while ‘housing’ inflation rose to a 12-month high in Apr’21.

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