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IIP, CPI

‘Factory production contracts; inflation rises’

* IIP contracted -1.6% in Jan after witnessing 1.6% revival in Dec.

* Manufacturing contracted by -2.0% in Jan (2.1% in Dec). 5 out of 23 industry group showed positive growth during month.

* Output of consumer goods sector contracted indicates further weakening of demand in economy.

* Investmentscenario continued to remain sluggish.

* CPI inflation rose to 5.0% in Feb after easing to 16-month low in Jan.

* Food inflation increased to 3.9% in Feb due to revival in vegetables prices.

Contraction in industrial production indicates fragile economy recovery which could be at risk due to re-surge in Covid cases in key industrial states, high oil prices and likely turning of interest rate in economy. High fuel & commodity prices are inserting upward pressure to inflation. We expect RBI to keep repo rate at hold in coming MPC meet while continuing with accommodative stance.

IIP contracts -1.6% in Jan

Indian industrial production unexpectedly contracted by -1.6% in Jan after turning positive in previous month (1.6% in Dec). Factory output contraction was significantly lower than the market expectation of 1% growth weighed down by decline in manufacturing production and continued contraction in mining activity. Manufacturing sector, which constitutes 77.6% of IIP index, contracted by -2% in Jan compared to 2.1% in Dec while manufacturing PMI which rose to 57.7 in Jan was indicating strong improvement. Mining sector contracted by -3.7% in Jun (-4.2% in Dec) due to decline in production of coal (coal production declined by -1.8% in Jan after five months of growth), crude oil (-4.6% in Jan) and natural gas (-2% in Jan). While, electricity sector grew by 5.5% in Jan v/s 5.1% in Dec. On use-based category, consumer durables contracted by -0.2% and non-durables at -6.8% showing weakening of demand. Capital goods again turned negative contracted by -9.6% in Jan due to weak investments in economy. During Apr-Jan’ FY21, IIP contracted by - 12.2% as compared to 0.5% during the year ago period.

Inflation rises to 5.0% in Feb

After falling three consecutive months, CPI inflation rose to 5.0% in Feb as food items prices revived during the month. CFPI, which constitutes 47.3% weight in IIP, rose to 3.9% in Feb (2% in Jan) because of sequential increase in vegetables prices, higher fruit and pulses prices. Inflation in transport & communication rose by 11.4% in Feb as higher fuel prices has been passed through. Core inflation remained sticky at 5.7% in Feb (5.5% in Jan) owing to elevated commodity prices. Inflation in some food items include pulses (12.5% in Feb v/s 13.3% in Jan), protein items (11.3% in Feb v/s 12.5% in Jan), fruits (6.3% in Feb v/s 5.0% in Jan), clothing & footwear (4.2% in Feb v/s 3.8% in Jan) and fuel (3.5% in Feb v/s 3.9% in Jan).

Outlook

Factory output contraction during Jan surprised economist and major disappointment was the negative growth in consumer goods sector which faded optimism over last month demand revival as vaccine rollout widens. Further sluggish growth in capital goods & infrastructure sectors is reflecting weak investments scenario in the economy. IIP contraction in Jan underlines fragile recovery which could be at risk from rising Covid-19 infections in key states such as Maharashtra and Karnataka. After expected -8% contraction, Indian economy is likely to grow at double digit. Though, increase in re-surge of Covid cases in key states Maharashtra, Karnataka, high crude oil & commodity prices and likely rise of interest rate can weigh on economy activity.

CPI inflation rose in Feb due to sequential revive in vegetables prices. Despite the spike, inflation is still within the RBI’s mandated target of 6%. Food inflation is expected to remain checked due to bumper kharif crop, rising prospects of a good rabi harvest, normalizing supply of vegetables and softer egg and poultry demand. However, high fuel and commodity price raised the upside risks to inflation. If crude oil prices sustain above $70/ barrel, it could impart around 40-45 bps impact on headline inflation.

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