IGI Logo

Inflation slumps even as industrial activity improves

* Headline CPI inflation surprised positively in Jan’21, easing to 4.06% on account of a slump in food prices, while core inflation budged marginally. The food inflation owed its fall to meaningful sequential easing in vegetables, cereals, and protein complex, with current trends hinting at further easing, albeit at a slower pace. Core inflation moderation has been milder at 5.16% from 5.24%, with health, recreation, education and transport costs showing a sequential uptick.

* While demand conditions overall remain patchy, gradual recovery in economic activity, possibly improving producers’ pricing power at the margin and rising input costs are weighing on underlying inflation. The improving momentum in economic activity is also validated by a pickup in Dec’20 industrial activity (1% yoy), which was led by manufacturing, with consumer demand driving the expansion.

* The healthy inflation print, nonetheless, could put significant downward pressure to the RBI’s Q4FY21 and H1FY22 forecasts and will also help reinforce an accommodative stance in CY21. We think headline inflation may average below 4.5% in FY22E as against ~6.2% in FY21E, assuming food inflation normalizes. We, however, remain watchful of risks in the form of cost push pressure in non-food and non-perishable goods, seasonal upside in food prices in summers and demand-led better pricing power.

CPI inflation surprises again led by slump in food prices

Inflation continued to surprise on the downside for the third consecutive month, printing 4.06% (Emkay: 4.25%, Consensus: 4.4%) in Jan’21 after 4.59% in Dec’20. This is the lowest inflation recorded in the last 16 months. The sharp correction was led by easing of food inflation, while core inflation budged marginally – pretty much the same theme as seen in Dec’20. Food inflation slumped to 1.9% on an annualized basis after 3.4% prior and average of ~10% in Apr-Nov’20, owing to sequential contraction in vegetables, cereals and protein complex. On an annualized basis, vegetable inflation contracted 15.8% (-14.6% mom) with fall seen across the board. High frequency mandi prices suggest perishables prices are falling further, albeit at a lesser pace, while eggs, meat and fish prices may continue to ease through Feb’21, given avian flu fears. However, the unfavorable base may lead to some rise in headline print in the coming months. Energy inflation rose 3.87% amid a sequential rise, driven by higher oil prices.

Core inflation nudges down albeit marginally

Core inflation (ex food, fuel and intoxicants) moderation has been much milder to 5.16% from 5.24% earlier, with health, recreation, education, and transport costs printing higher sequentially. Personal Care and Effects also rose sequentially despite correction in gold and silver prices to print close to 10.6% yoy. Overall, a gradual albeit patchy recovery in economic activity, possibly improving producers’ pricing power at the margin, rising input costs, higher administrative fuel costs etc. could weigh on core inflation. However, easing disruptive supply logistics and wide output gap should ensure that the upside is capped on underlying inflation dynamics.

Dec’20 IIP rises 1.0% led by manufacturing

Dec’20 IIP came in better than expected at 1.0% (Emkay: -1.3%, Consensus: -0.1%), implying 1% growth in Q3FY21 -- the first positive quarterly growth in six quarters, reflective of improving capacity utilization and improving economic activity. Industry-wise, pick-up in production activity was led by manufacturing, which reverted to positive growth of 1% (-2.0% earlier) and continued gains in electricity (5.1%), while mining continued to contract, printing -4.8%. Sector-wise, consumer durables grew 4.9%, while nondurables rose 2.0%. Capital goods production rose modestly by 0.6%, while intermediate goods production was up 0.4%.

The MPC to draw comfort, but further conventional easing looks elusive

The Jan’21 CPI inflation surprise would imply that the revised Q4FY21 estimate of RBI at 5.2% could see further downside of 40-50bps. If food inflation normalizes next year to below 3% (from 8%+ in FY21E), the headline inflation could average comfortably below 4.5% in FY22E (vs. ~6.2% in FY21E). However, risks of increasing input costs, higher commodity prices and seasonal upside in food prices and better pricing power remain key risks to inflation. We see core inflation outdoing headline inflation through most part of FY22. While this could worry the policymakers, the policy stance will likely remain accommodative both on rates and liquidity front in CY21.

To Read Complete Report & Disclaimer Click Here

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354

Above views are of the author and not of the website kindly read disclaimer