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CPI inflation in Sep’21 and Aug’21 IIP growth is in line with our expectations

Expect no change in monetary policy

* CPI-based retail inflation came in at a five-month low of 4.35% YoY in Sep’21 as against 5.3% YoY in Aug’21. The number was broadly in line with our expectations of 4.4% YoY, but slightly lower than Bloomberg consensus of 4.5% YoY in Sep’21. With this, CPI inflation in 2QFY22 stood at 5.1% YoY (similar to our expectation) v/s 5.6% YoY in 1QFY22.

* Food inflation (CPI weightage: 39.1%) came in at a 30-month low of 0.7% YoY in Sep’21 as compared to 3.1% YoY in Aug’21. Vegetables exhibited a deep deflation of 22.5% (only lower than -31.9% YoY seen in Jan’12). CPI, excluding vegetables, actually came in higher at 6.7% YoY in Sep’21 as compared to 6.6% YoY in Aug’21. Notably, ‘fuel and light’ (CPI weightage: 6.8%) inflation came in at 13.6% YoY in Sep’21 (the highest since the new series began in Jan’12).

* Inflation in core items (housing, clothing and footwear, and miscellaneous items) stood at 5.8% YoY in Sep’21 from 5.9% YoY in Aug’21. Within miscellaneous items, all items except ‘recreation and amusements’ and ‘personal care and effects’ exhibited lower inflation in Sep’21 as compared to Aug’21.

* Separately, IIP was up 11.9% YoY in Aug’21 (against 11.5% YoY in Jul’21). The number is higher than Bloomberg consensus of 11.6% YoY, but in line with our expectation. Notably, the IIP number for May’21 has been revised marginally downwards to 27.6% YoY from 28.6% YoY earlier.

* Manufacturing activity (IIP weightage: ~78%) grew 9.7% YoY, mining activity (IIP weightage: ~14.4%) grew 23.6% YoY, and power generation grew 16% YoY in Aug’21. All three were led by very low bases. According to the use-based classification, only primary and consumer goods grew faster in Aug’21.

* With Aug’21 actual IIP data, our in-house indicators for real-GVA growth remains broadly unchanged at 8.5% YoY (from 8.4% YoY estimated earlier). Accordingly, our forecast for real GVA growth of 7-8% YoY in 2QFY22 remains unchanged.

* There were no surprises in CPI data for Sep’21. In fact, 5.1% YoY inflation in 2QFY22 was also in line with RBI’s expectations. Therefore, we continue to expect only a gradual normalization in the monetary policy, with the first reverse repo rate hike in either Feb’22 or Apr’22.

* CPI inflation at a five-month low in Sep’21…: CPI-based retail inflation came in at a five-month low of 4.35% YoY in Sep’21 as against 5.3% YoY in Aug’21. The number was broadly in line with our expectations of 4.4% YoY, but slightly lower than Bloomberg consensus of 4.5% YoY in Sep’21. With this, CPI inflation in 2QFY22 stood at 5.1% YoY (similar to ours and RBI’s expectations) v/s 5.6% YoY in 1QFY22.

* …on account of lower food inflation…: Food inflation (CPI weightage: 39.1%) came in at a 30-month low of 0.7% YoY in Sep’21 as compared to 3.1% YoY in Aug’21 and 10.7% YoY in Sep’20. Vegetables, one of the most seasonal food items, exhibited a deep deflation of 22.5% (only lower than -31.9% YoY seen in Jan’12, just when the CY11-12 series began). CPI, excluding vegetables, actually came in higher at 6.7% YoY in Sep’21 as compared to 6.6% YoY in Aug’21. Other items— pulses and products, eggs, meat and fish, spices—too exhibited lower inflation in Sep’21 v/s Aug’21. Notably, ‘fuel and light’ (CPI weightage: 6.8%) inflation came in at 13.6% YoY in Sep’21 (the highest since the new series began in Jan’12).

* …and core inflation too came in at a five-month low of 5.8% YoY in Sep’21: Inflation in core items (housing, clothing and footwear, and miscellaneous items) stood at 5.8% YoY in Sep’21 from 5.9% YoY in Aug’21. Within miscellaneous items, all items except ‘recreation and amusements’ and ‘personal care and effects’ exhibited lower inflation in Sep’21 as compared to Aug’21.

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