E
CO
S
COPE
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
rates unchanged.
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
Jan-15 target.
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
(Dipankar.Mitra@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through disclosures made at the end of the Research Report.

RBI may keep rates unchanged:
While inflation has remained due to a sharp
increase in vegetable prices, this may not be a durable phenomenon. Moreover,
the advantage of a sharp decline in international commodity prices may still
accrue while WPI is set to fall rapidly. On the other hand, adverse base since
Dec-14 and less than normal rainfall continue to pose risk for the 8% target of
RBI by Jan-15. Thus, RBI may keep the rates unchanged on balance.
Stability after the broad trend of softening in inflation
14
12
10
8
6
4
CPI-IW
CPI-AL
CPI-RL
CPI-RU
Core CPI inflation lowest ever and converges
12
10
8
6
Core Retail - Rural
Core Retail - Combined
Core Retail - Urban
9.2
8.4
7.3
6.9
Source: CSO, MOSL
Source: CSO, MOSL
Rural inflation stayed higher while both increased
12
11
10
9
8
7
6
CPI (Rural)
CPI (Urban)
11.7
10.5
Rural inflation higher for all categories
Rural
10
8
9
5
3
4
9
7
9
Urban
8 8
6
5 6
Total
8
7
8
8.3
7.0
Source: CSO, MOSL
Source: CSO, MOSL
II. Jul-14
IIP slumps to 0.5%; consumer goods drag down IIP by 331bp
Jul-14 IIP at 3.4%:
Jul-14 IIP stood at 0.5%, much lower than expectations (MOSL
2.1%, Consensus 1.8%). This meant a sharp deceleration from 3.9% during Jun-
14 and 5% during May-14. However, Jun-14 IIP saw an upgrade to 3.9% from
3.4% estimated earlier.
YTDFY15 at 3.3%:
Cumulative IIP for YTDFY15 however, remained respectable at
3.3% v/s a stagnation (-0.1%) during YTDFY14.
Mining and electricity growth continues:
Mining sector remained in positive
territory (2.1%), while electricity remained in double digit (11.7%). However,
manufacturing showed degrowth (-1%) after three consecutive months of
positive growth.
Capital goods degrows again:
Capital goods sector too showed degrowth
(-3.8%) after three consecutive months of positive growth. This shave off 53bp
from overall IIP growth.
2
13 Sep 2014

Consumer shaves off 235bp from IIP:
The lower-than-expected IIP was entirely
on account of continued de-growth in consumer sector by -7%. This was entirely
due to sharp degrowth in durables (-21%), while non-durables accelerated (2.9%
from 0.6% during Jun-14.. Thus, consumer durables shaved off 286bp from the
overall IIP, while overall consumer sector caused 235bp pruning of overall IIP.
See FY15 IIP at 5.2%:
The sharp decline in consumer goods sector contrasts with
the 6-8% volume growth seen by FMCG companies and may involve data issues.
The inventory de-accumulation may have played a role. We expect IIP to recover
from this temporary setback in the next month and show sharper growth
thereafter. Hence, we expect IIP to revive to 5.2% during FY15, from -0.1%
during FY14.
Cumulative IIP ~0 in last two years created a favorable base
IIP shows signs of upturn
10
8
6
4
2
0
-2
-4
3.7
5.0
3.9
0.5
FY15E (3.8)
FY14 (-0.1)
FY13 (1.2)
5
4
3
2
1
0
-1
-2
YTDFY15
4.4 4.2
3.7
3.3
YTDFY13
YTDFY14
Source: CSO, MOSL
Source: CSO, MOSL
IIP shows signs of revival
Weight
Overall IIP
Broad Sectors
Mining & quarrying
Manufacturing
Electricity
Sectors - Use based
Basic goods
Capital goods
Intermediate goods
Consumer goods
Consumer durables
Consumer non-durables
46
9
16
30
8
21
6.4
4.3
3.2
4.2
3.4
4.8
10.0
23.3
2.4
-9.7
-23.4
0.6
7.6
-3.8
2.6
-7.4
-20.9
2.9
0.1
1.4
2.0
-1.8
-11.9
7.2
8.1
8.5
2.8
-4.5
-12.5
1.3
6.0
14.8
7.4
8.5
14.2
4.2
5.5
-4.0
-0.6
4.4
2.6
5.9
2.5
-5.6
1.7
2.6
2.2
2.8
2.1
-3.6
3.1
-2.7
-12.2
5.0
9.5
13.2
4.9
-1.1
-6.2
2.6
14
76
10
2.9
5.1
6.7
4.5
2.5
15.7
2.1
-1.0
11.7
-4.3
-0.1
3.9
2.8
2.3
11.4
5.2
8.9
5.5
-1.9
3.0
8.2
-2.2
1.3
4.0
-0.6
-0.7
6.1
6.0
3.9
10.6
100
May-14
5.0
Jun-14
3.9
Jul-14 YTDFY14
0.5
-0.1
YTDFY15
3.3
FY11
8.2
FY12
2.9
FY13
1.2
FY14
-0.1
FY15E
5.2
Source: CSO, MOSL
13 Sep 2014
3

Macro Economic Indicators
Annual
I. National Income (Growth %)
Nomi na l GDP (USDb)
Gros s Domes ti c Product
Agri cul ture
Foodgra i ns (M Ton)
Ra i nfa l l (% of l ong peri od a vera ge)
Indus try
Servi ces
II. Inflation (Y-o-Y %)
WPI (Annua l Avera ges )
Al l commodi ti es
Pri ma ry a rti cl es
Fuel & power
Ma nufa ctured products
CPI-IW/CPI-RU (from FY12)
Rs
Tota l recei pts
Di rect ta x
Indi rect ta x
Net ta x
Tota l expendi ture
Pl a n
Non-pl a n
of whi ch s ubs i di es
Fi s ca l defi ci t
Revenue defi ci t
Combi ned fi s ca l defi ci t (centre + s ta tes )
Publ i c debt
IV. Money and Banking (Y-o-Y%)
Res erve money
Money Suppl y (M3)
Depos i ts
Ba nk credi t
V. External Sector
(i n USDb)
Exports
Imports
Tra de Defi ci t
Invi s i bl e Surpl us
Current A/c defi ci t
Net ca pi ta l fl ows
Forex Res erves
(As % of GDP)
Exports
Imports
Tra de Defi ci t
Invi s i bl e Surpl us
Current A/c defi ci t
Externa l debt
VI. Financial Markets (Avg %)
Ca l l ra te
1-yr AAA corpora te bond
Yi el d on 10-yr G-s ec (%)
Excha nge Ra te (INR/USD)
BSE Sens ex return
P/E ra ti o (Tra l l i ng)
Ma rket ca pi ta l i s a ti on (a s % of GDP)
Oi l pri ce (Indi a n Ba s ket, USD/bbl )
Fi gures i n red a re es ti ma tes
FY05 FY06 FY07 FY08 FY09 FY10
721
7.0
0.2
198
5.0
9.8
8.1
834
9.5
5.1
209
-9.0
9.7
10.9
948 1,239 1,226 1,366
9.6
9.3
6.7
8.6
4.2
5.8
0.1
0.8
217 231 234 218
-1.0 -5.0 -1.0 -10.0
12.2
9.7
4.4
9.2
10.1 10.3 10.0 10.5
FY11
1,708
8.9
8.6
245
-19.0
7.6
9.7
FY12
1,879
6.7
5.0
259
2.0
7.8
6.6
FY13
1,858
4.5
1.4
250
-7.0
1.0
7.0
FY14 FY15E
1,878
4.7
4.7
263
6.0
0.4
6.8
2,113
5.5
3.3
265
-7.0
3.3
6.9
6.5
3.7
10.1
6.3
3.8
15.6
4.1
5.3
6.9
15.4
4.1
11.3
1.4
3.9
2.4
7.2
82
12.1
12.3
10.8
26.2
4.4
2.9
9.5
3.1
4.4
14.3
4.5
5.4
7.3
13.7
3.8
9.9
1.3
4.0
2.5
6.5
79
17.2
21.2
23.4
38.0
6.5
9.6
6.5
5.6
6.7
13.6
5.4
5.7
8.2
13.6
4.0
9.6
1.3
3.3
1.9
5.4
75
23.7
21.3
23.8
28.1
4.8
8.3
0.0
4.9
6.2
14.3
6.3
5.6
8.8
14.3
4.1
10.2
1.4
2.5
1.1
4.1
71.4
31.0
21.4
22.4
22.3
8.0
11.1
11.6
6.1
9.1
15.8
6.0
4.9
7.9
15.8
4.9
10.9
2.3
6.0
4.5
8.5
72.2
6.4
19.3
19.9
17.5
3.6
12.7
-2.1
1.8
12.4
15.9
5.8
3.8
7.1
15.9
4.7
11.2
2.2
6.5
5.2
9.6
70.8
17.0
16.9
17.2
16.9
9.6
17.8
12.3
5.7
10.5
15.6
5.8
4.5
7.4
15.6
4.9
10.7
2.3
4.9
3.3
7.4
66.0
19.1
15.9
15.8
21.4
8.9
9.9
13.6
7.3
10.5
14.8
5.6
4.5
7.2
14.8
4.8
10.0
2.4
5.9
4.4
8.0
65.6
9.2
13.0
13.4
17.0
7.4
9.8
10.6
5.4
10.2
13.9
5.5
4.7
7.3
13.9
4.1
9.9
2.5
4.9
3.6
7.1
64.0
8.4
13.6
14.3
14.1
6.0
9.8
10.1
3.0
9.5
14.0
5.6
4.6
7.4
14.0
4.2
9.8
2.3
4.6
3.3
6.7
65.0
9.5
13.5
14.3
14.6
5.5
6.5
6.0
3.4
7.7
13.7
5.9
4.8
7.7
13.7
4.3
9.4
2.0
4.1
3.0
6.0
10.0
12.0
13.0
15.0
85
119
-34
31
-2
28
142
11.8
16.5
-4.7
4.3
-0.3
18.5
4.7
5.5
6.2
44.9
16.1
14.4
52.4
39.2
105
157
-52
42
-10
25
152
12.6
18.8
-6.2
5.0
-1.2
17.3
5.6
6.7
7.1
44.3
73.7
21.6
81.8
55.7
129
191
-62
52
-10
45
199
13.6
20.1
-6.5
5.5
-1.0
18.2
166
258
-91
76
-16
107
310
13.4
20.8
-7.4
6.1
-1.3
18.1
189
309
-120
92
-28
7
252
15.5
25.4
-9.8
7.5
-2.3
20.5
182
301
-118
80
-38
53
279
13.2
21.8
-8.6
5.8
-2.8
18.9
3.2
5.9
7.2
47.4
80.5
21.0
95.2
69.6
251
381
-130
86
-44
57
305
14.5
22.1
-7.6
5.0
-2.6
17.3
4.5
8.1
7.9
45.6
10.9
19.0
87.7
85.1
310
500
-190
112
-78
68
294
16.8
27.0
-10.3
6.0
-4.2
18.7
8.0
9.6
8.4
47.9
-10.5
15.5
69.0
111.9
307
502
-196
107
-88
89
293
16.3
26.7
-10.4
5.7
-4.7
21.4
8.0
8.2
9.3
54.4
8.2
15.9
62.9
108.3
319
466
-148
115
-32
48
304
17.0
24.8
-7.9
6.1
-1.7
23.2
8.1
9.4
8.3
60.5
18.8
16.7
65.4
105.5
326
491
-165
122
-43
80
340
15.4
23.2
-7.8
5.8
-2.1
24.2
8.0
9.0
8.0
59.0
17.0
70.8
105.8
7.2
6.1
7.1
8.5
9.3
9.8
7.8
7.9
7.6
45.3 40.2 45.9
15.9 19.7 -37.9
18.2 18.8 11.8
82.5 103.0 54.8
62.4 79.5 82.7
13 Sep 2014
4

Macro Economic Indicators
Quarterly
I. National Income (Growth %)
Gros s Domes ti c Product
Agri cul ture
Indus try
Servi ces
II. External Sector (USDb)
Exports
Imports
Tra de Defi ci t
Invi s i bl e Surpl us
Current A/c defi ci t
Net ca pi ta l fl ow
Forex Res erves
Dec-11 Mar-12
6.0
4.1
2.6
8.3
71
119
-48
28
-20
8
297
5.1
2.0
2.1
7.3
80
132
-52
30
-22
17
294
Jun-12 Sep-12 Dec-12 Mar-13
4.5
1.8
0.3
7.2
75
119
-44
27
-17
16
290
4.6
1.8
-0.4
7.6
73
120
-48
27
-21
18
295
4.4
0.8
1.7
6.9
74
133
-58
27
-32
31
297
4.4
1.6
2.1
6.3
85
130
-46
28
-18
21
293
Jun-13 Sep-13 Dec-13 Mar-14
4.7
4.0
-0.4
7.2
74
124
-50
29
-22
21
285
5.2
5.0
2.6
6.3
81
115
-33
28
-5
-5
276
4.6
3.7
-0.4
7.2
80
113
-33
29
-4
24
296
4.6
6.3
-0.2
6.4
84
114
-31
29
-1
9
304
Jun-14
5.7
3.8
4.2
6.8
82
116
-35
27
-8
20
316
Macro Economic Indicators
Monthly
Sep '13 Oct '13 Nov '13 Dec '13 Jan '14 Feb '14 Mar '14 Apr '14 May '14 Jun '14 Jul '14
I. Growth and inflation (Y-o-Y %)
IIP
2.7
-1.2
-1.3
0.1
1.1
-1.8
-0.5
3.4
5.0
3.4
WPI - Al l commodi ti es
7.1
7.2
7.5
6.4
5.1
5.0
6.0
5.5
6.2
5.4
5.2
Pri ma ry a rti cl es
14.0
14.6
15.3
10.8
6.8
6.3
7.3
7.0
8.6
6.8
6.8
Fuel & power
11.7
10.5
11.1
10.9
9.8
8.7
11.8
9.3
10.5
9.0
7.4
Ma nufa ctured products
2.4
2.8
2.9
3.0
3.0
3.4
3.7
3.7
3.9
3.6
3.7
CPI-RU
9.8
10.2
11.2
9.9
8.8
8.0
8.3
8.6
8.3
7.5
8.0
II. Fiscal situation (as % of budgeted)
Tota l recei pts
35.4
41.3
45.6
57.7
69.2
75.1
99.0
0.6
3.2
9.2
14.2
of whi ch ta x revenue
34.8
40.3
44.8
58.6
68.9
75.0
97.6
0.1
2.9
10.1
15.0
Tota l expendi ture
48.6
55.4
61.3
69.9
79.8
88.0
98.3
6.8
15.9
23.0
28.1
Non-pl a n
51.6
58.9
65.8
73.2
80.8
88.9
99.6
8.1
18.3
24.7
30.5
Pl a n
42.5
48.3
52.4
63.3
77.6
86.0
95.3
4.1
10.7
19.4
23.0
Fi s ca l defi ci t
76.0
84.4
93.9
95.2 101.6 114.3
96.9
21.5
45.6
56.1
61.2
Revenue defi ci t
84.8
92.9 103.5
97.7 102.3 117.3
97.3
26.4
53.6
65.9
70.4
III. Money and Banking (Y-o-Y%)
Res erve money
6.2
8.6
12.1
10.7
8.2
9.8
14.4
9.0
11.9
9.8
11.5
Money Suppl y (M3)
13.0
13.7
14.9
14.8
14.5
14.5
13.2
13.7
13.5
12.2
12.7
Ba nk Credi t (Y-o-Y %)
17.9
16.6
14.2
14.5
14.7
14.3
14.3
14.3
13.6
13.3
13.3
Depos i ts (Y-o-Y %)
14.1
14.4
16.1
15.9
15.7
15.8
14.6
15.3
14.6
12.4
13.0
IV. External Sector
Exports (USD b)
27
27
24
26
26
26
30
26
28
26
28
Exports (Y-o-Y %)
10.3
13.1
2.0
1.9
2.4
-3.7
-3.8
5.3
12.4
10.2
7.3
Imports (USD b)
34
38
34
36
36
34
40
36
39
38
40
Imports (Y-o-Y %)
-18.8
-14.5
-16.7
-15.3
-18.8
-17.1
-1.1
-15.0
-11.4
8.3
4.3
Tra de Defi ci t (USD b)
-7
-11
-10
-11
-10
-8
-11
-10
-11
-12
-12
Forex Res erves (USD b)
276
283
291
296
291
294
304
310
312
316
321
Rea l effecti ve excha nge ra te
89.9
92.2
94.9
96.4
96.2
95.9
97.9
99.4 104.2 103.8 103.1
RBI's net forex i nterventi on
-3.5
3.9
3.9
10.1
3.5
-1.9
7.8
5.9
1.8
0.6
V. Financial Markets (Avg %)
Ca l l ra te
9.7
8.6
8.2
7.9
7.9
8.0
8.1
7.9
7.7
7.9
8.0
Govt borrowi ng (% compl eted)
59.8
67.5
80.3
88.0
98.3 100.0 100.0
11.4
25.5
33.2
42.9
91-da y T-bi l l
10.5
8.9
8.9
8.7
8.8
9.1
9.1
8.9
8.8
8.6
8.6
Yi el d on 10-yr G-s ec (%)
8.5
8.6
9.0
8.8
8.7
8.8
8.8
8.9
8.7
8.6
8.7
SBI Ba s e ra te
9.8
9.8
10
10
10.0
10.0
10.0
10.0
10.0
10.0
10.0
CP - 3 month
11.0
9.5
9.4
9.1
9.5
10.0
10.0
9.4
9.2
8.9
8.9
CD - 1yr
10.1
9.2
9.2
9.3
9.3
9.7
9.5
9.2
9.1
8.9
9.0
AAA corpora te - 1yr
10.9
9.6
9.7
9.8
9.4
9.9
9.8
9.5
9.3
9.0
9.2
Excha nge Ra te (INR/USD)
63.8
61.6
62.6
61.9
62.1
62.3
61.0
60.4
59.3
59.7
60.1
BSE Sens ex return
4.1
9.2
-1.8
1.8
-3.1
3.0
6.0
0.1
8.0
4.9
1.9
P/E ra ti o (1 Yea r Forwa rd)
13.5
14.6
14.2
14.3
13.7
14.0
14.7
14.5
15.4
15.9
15.9
Mkt ca pi ta l i za ti on (a s % of GDP)
55.6
60.0
59.7
61.8
62.1
62.3
61.0
60.4
66.3
71.2
71.0
Oi l (Indi a n ba s ket, USD/bbl )
109.5 107.5 106.6 108.8 105.3 106.1 105.1 105.7 106.77 109.2 106.1
13 Sep 2014
5

E
CO
S
COPE Data Monitor
Annual
GDP growth (%): Moderate recovery in growth suggested
Quarterly/Monthly
GDP growth (%): First signs of growth pick-up
Inflation: Showing signs of moderation
Inflation: CPI firms up to ~8%; WPI around 5%
Fiscal deficit (% to GDP): Consolidation process has started
Fiscal trend: Year-end consolidation expected
Credit growth constrained by slowdown and tight money
Credit growth has slowed down
13 Sep 2014
6

E
CO
S
COPE Data Monitor
Annual
External sector: Stability in trade and current A/c deficit
Quarterly/Monthly
External sector: Exports pick up, deficit under check
Financial markets: Rates stable now while yield curve is flat
Financial markets: The spike in interest rates has corrected
Market ended with good return in FY14
Markets are fairly valued now
INR depreciated; forex reserves static
RBI intervened to stabilize INR
13 Sep 2014
7

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8