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* IIP grew by 1% in Dec v/s -2.1% in Nov

* Recovery in factory output was led by manufacturing sector which grew by 1.6% in Dec.

* 9 out of 23 industry group showed positive growth during month

* Contraction in natural gas & crude oil production impacted mining sector output (-4.8% in Dec)

* Demand revived in Dec as reflected by expansion in consumer goods.

* Investmentscenario continued to remain sluggish.

* CPI inflation eased to 16-month low of 4.1% in Jan.

* Food inflation declined to 1.9% in Jan due to sharp decline in vegetables’ prices.

* Fuel prices and core inflation remained elevated.

In spite of easing food inflation, the RBI may continue with accommodative stance and keep policy rate at hold in the view of elevated core inflation and rising fuel prices.

IIP returns to growth with 1% expansion in Dec

Industrial production grew by 1.0% in Dec after posting -2.1% contraction in the previous month. Factory output returned into expansion after a gap of month led by manufacturing and electricity sector. Manufacturing sector, which constitutes 77.6% of IIP index, grew by 1.6% in Dec (-2.0% in Nov) partly supported by favourable base effect of -0.3% in Dec’19. In terms of industries, 9 industries out of 23 industry group posted positive growth during the month. Electricity sector grew by 5.1% while mining contracted by -4.8% during the month due to -3.6% contraction in crude oil production and -7.2% decline in natural gas output. On use-based category, consumer durables sector grew by 4.9% in Dec (-3.4% in Nov) and non-durables at 2.0% (-1.3% in Nov) majorly supported by favourable base effect. Capital goods and infrastructure sector grew at 0.6% and 0.9% during the month under review.

CPI inflation eases to 16-month low of 4.1% in Jan

CPI inflation eased to 16-month low of 4.1% in Jan from 4.6% in Dec as vegetables’ prices crashed with increased winter supply. CFPI, which constitutes 47.3% weight in IIP, further declined to 1.9% in Jan (3.4% in Dec) mainly driven by -15.7% fall in the vegetables’ prices. Potato prices declined by -9.6%, onion prices by -36.1% and tomato prices by -3.65% in the month of Jan. Inflation in cereals also reduced to 0.1% in Jan from 1.0% in Dec as bumper Kharif harvest arrivals weighed on prices. Meanwhile, inflation in some food items include pulses (13.4% in Jan v/s 16% in Dec), protein items (12.5% in Jan v/s 15.2% in Dec) and fruits (5% in Jan v/s 2.7% in Dec) remained sticky. Fuel inflation rose to 3.9% in Jan v/s 2.9% in Dec due to increase in crude oil prices. Core inflation remained elevated at 5.8% in Jan from 5.7% in Dec due to hardening of core items prices.

Outlook

IIP at 1% during Dec came higher than market estimation of 0.1% supported by revival in manufacturing sector as indicated by PMI data & strong auto sales number in Dec. Though continued weak performance of mining sector is impacting IIP revival. Output growth in consumer durables & non-durables sectors showed recovery in demand, also supported by favourable base effect.

Though expansion in consumer goods sector is required for next two months to check sustainability of demand in economy. However sluggish growth in capital goods & infrastructure sectors despite favourable base is reflecting weak investments scenario in the economy. Key indicators such as manufacturing PMI which rose to 57.7 in Jan (56.4 in Dec) and strong auto sales numbers indicate further revival in manufacturing conditions during Jan.

Owing to sharp decline of vegetables and cereals prices, inflation declined to 4.1% in Jan, coming within RBI’s target band for the second consecutive month. Bumper kharif crop, rising prospects of a good rabi harvest, larger winter arrivals of key vegetables and softer egg and poultry demand on avian flu are putting downward pressure on food inflation.

Core inflation is expected to remain sticky as increase in raw materials is putting broad based escalation in cost-push pressures in services & manufacturing prices. The RBI revised CPI inflation forecast to 5.2% in Q4FY21 (from earlier estimate of 5.8%) and 5.2-5.0% in H1FY22 (earlier estimate of 5.2-4.6%).

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