Inflation remains high; IIP lower v/s expectations
CPI at 7.8% though core lowest ever; IIP at 0.5%
13 Sep 2014
The Economy Observer
Aug-14 Inflation & Jul-14 IIP
The Aug-14 CPI Rural Urban (CPI-RU) inflation remained high at 7.8%
broadly in line with expectations. YTD CPI was steady at 8%.
The high CPI inflation was due to high vegetables inflation (15% adding
106bp) and fruits inflation (24% adding another 50bp).
Core inflation slumped to the lowest ever of 6.9% in 32 months of the
new CPI series while rural and urban core too converged. Thus,
vegetables inflation is yet to be generalized. Rural inflation stayed
higher for all sub groups within CPI.
The sharp fall in international commodity prices would exert a
downward pressure on inflation. Thus we expect RBI to keep policy
Aug-14 CPI-RU remains high at 7.8%
Vegetables inflation at 15%, fruits 24%
Core CPI lowest ever at 6.9%
Rural higher than urban for all sub-groups
Jul-14 IIP at 0.5%
Electricity and mining showed growth
Capital good and durables faltered shaving
off 53bp and 286bp from IIP respectively
Expect RBI to keep policy rates unchanged
food inflation is not generalized, falling
commodities bring stability and growth yet
to show durable recovery
Jul-14 IIP at 0.5% was well below expectation and represented a sharp MoM deceleration from 3.9% a month ago.
However, mining growth continued while electricity too maintained double digit growth.
Capital goods showed degrowth after three months shaving off 53b from overall IIP. Sharp and continued degrowth in
consumer durables shaved off another 286bp. Non-durables however, staged a moderate recovery.
We expect the sharp deceleration to be temporary and possibly caused by inventory de-accumulation. Hence, we hold
FY15 IIP will register 5.2% growth, helped by a low base, proactive policy and return of consumer sentiments.
I. Aug-14 CPI at 7.8%; vegetables at 15%; core-retail lowest ever at 6.9%
CPI-RU inflation remains high:
The CPI-Rural Urban (CPI-RU) inflation remained
high at 7.8%, broadly as per expectations (MOSL 7.6%, Consensus 7.8%).
Cumulative inflation for the first five months of FY15 was 8%, the same as RBI’s
Spike is caused by vegetables and fruits prices:
The continued high vegetable
prices largely explains the stubbornly high CPI inflation. Vegetables prices rose
15%, adding 106bp to overall CPI inflation (explaining 14% of total inflation with
a weight of just 5% in the CPI basket). Similarly 24% jump in fruits prices added
another 50bp to overall CPI inflation. Thus, food group inflation remained high
at 9.2% from 9.1% a month ago.
Core inflation lowest ever at 6.9%:
The core retail inflation however, fell sharply
and at 6.9% was lowest ever in 32 months, since the inception of the new CPI
index. Both rural and urban core inflation declined proportionately MoM to
converge near 6.9%.
Rural inflation stayed higher:
Rural inflation at 8.3% however, continued to rule
distinctly higher than 7% (and falling) urban inflation. Moreover, rural inflation
stayed higher than urban inflation for each sub-group.
(Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through disclosures made at the end of the Research Report.