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CPI inflation marginally higher in Oct’21; IIP growth below expectations

* CPI-based retail inflation came in moderately higher at 4.48% YoY in Oct’21 (v/s 4.35% YoY in Sep’21). The number is in line with our expectations as well as the Bloomberg consensus.

* Food inflation (CPI weight: 39.1%) came in at 0.9% YoY in Oct’21, after 2.5-year-low food inflation at 0.7% YoY in Sep’21. The items driving this marginal increase were ‘cereals and products,’ ‘fruits,’ ‘milk and products,’ and ‘sugar confectionary’. These items constitute more than 20% weight in the food basket. Notably, ‘fuel and light’ (CPI weight: 6.8%) inflation continued rising and came in at 14.3 % YoY in Oct’21 (v/s 13.6% YoY in Sep’21).

* Core inflation coming in higher at 6.2% YoY in Oct’21 (v/s 5.9% YoY in Sep’21) is a cause for concern – similar levels were last seen during May–Jun’21. Core inflation has risen on the back of higher inflation in ‘clothing and footwear’ and ‘miscellaneous items.’ Within ‘miscellaneous items,’ ‘transport and communication,’ ‘personal care and effects,’ and ‘household goods and services’ posted higher inflation in Oct’21.

* Separately, IIP growth stood at 3.1% YoY in Sep’21 (v/s 12% YoY in Aug’21). The number is lower than our expectation of 4.4% and the Bloomberg consensus of 4.8% YoY. Notably, IIP growth for Jun/Aug’21 has been revised upwards to 13.8%/12% YoY (from 13.6%/11.9% YoY). With this, IIP grew 8.8% YoY in 2QFY22 v/s a contraction of 5.7% YoY in 2QFY21 and growth of 44.3% YoY in 1QFY22 (led by a very low base of -35.5% YoY in 1QFY21).

* Manufacturing activity (IIP weight: ~78%) grew 2.7% YoY, mining activity (IIP weightage: ~14.4%) grew 8.6% YoY, and power generation grew 0.9% YoY in Sep’21. All three grew 9.9%, 23.6%, and 16% YoY, respectively, in Aug’21. According to use-based classification, only consumer goods contracted, while other components edged up in Sep’21.

* With Sep’21 actual IIP data, our in-house indicators for real-GVA growth remain broadly unchanged at 5.5% YoY (from 5.4% YoY estimated earlier). Accordingly, we expect real GVA growth of 8–9% YoY in 2QFY22

* Overall, CPI inflation remained broadly stable and in line with expectations. Therefore, we continue to expect gradual normalization in monetary policy, with a reverse repo rate hike likely only in the next financial year.

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