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CRISIL First Cut

Food prices lift inflation; IIP moves up
July 2016

a 22-month high . especially in rural areas. In terms of use based classification. Key monitorables for food inflation are: 1) Monsoon. core inflation moderates  CPI inflation remained high at 5.4% (+20bps). slowed down in June. which is keeping core inflation high and sticky.3% in June. 3) Unfavourable temporal and spatial distribution of rainfall. The mild improvement in manufacturing was seen in both the consumer oriented and industrial and investment oriented segments.7% in June. capital goods segment continued to remain a drag (-12. and proactive steps taken by the government to manage food supply will rein in food inflation this fiscal. Moreover.  Rural inflation inched down to 6. We expect the average CPI to stay close to 5% this fiscal. Latest data suggests rainfall is 1% above normal so far. Inflation outlook  We expect CPI inflation to stay soft at 5%. health. recreation and amusement and personal care and effects. along with the lagged impact of interest rate reductions.3% in April. led by lower inflation in clothing and footwear. We. While it is 5% and 14% above normal in the northwest and central 2 .4% in fiscal 2016. which will help raise reservoir levels and support sowing. as forecast by the India Meteorological Department (IMD). education and personal care and effects that have remained sticky for some months. and. CRISIL Research believes the increase in the consumer price index-linked (CPI) inflation is transitory.8% . Risks to inflation could emanate from: 1) High protein inflation.3%. Protein inflation cooled off a bit as meat and fish inflation slowed. unchanged from the previous fiscal. core inflation moderated by 20bps to 5%. therefore.4% growth) even as basic. IIP growth perked up in May. 4) Oil prices. and. the decline in core inflation came from items such as health. Food inflation rose to 7. A normal monsoon will soften food inflation and offset the upside risk to overall inflation from higher crude prices and sticky services inflation. vegetables. Electricity sector growth. 3) Pulses and oilseed inflation.5% in May while urban inflation increased 40 bps to 5.2% from 6. expect industrial GDP growth to increase to 7. 2) Service inflation.2% in May. intermediate and consumer goods segment improved their performance. however. pulses and products and sugar.2% in May. assuming a normal monsoon and proactive food supply management by the government.  Fuel inflation (including petrol and diesel) inched up slightly on the back of higher diesel. salary revisions and easier monetary conditions are expected to support demand in future and boost industrial activity. education. which has recorded doubledigit growth for 13 consecutive months.8% in June. While food inflation increased to 7.6% in fiscal 2017 from 7. A normal monsoon.in June on the back of rising food inflation. Above-normal monsoon.  Latest IMD data shows rainfall so far is 1% above normal. which could improve rural demand. LPG and Kerosene prices.2% on-year compared to -1.at 14. we expect the central bank to deliver another rate cut in August. fuel.  Core inflation (excluding food. Retail inflation remains high. 2) Global commodity prices. The resulting lower food inflation will offset higher services inflation. Therefore.5% at its June 7 meeting. as the manufacturing sector crawled back in the positive zone after two months of negative growth. After the Reserve Bank of India (RBI) kept its policy rate unchanged at 6.4% in June from 7. assuming a favourable monsoon with adequate temporal and spatial distribution. on higher food inflation. especially in cereals. we believe it will take 1-2 months for the benefit of the rains to wash away the rise in food prices. month-on-month momentum in food inflation slowed down from 1. So far sowing area is 15% below the normal (as of July 1).2% in May to 0. led by a rise in food inflation.Inflation rose to 5. Rainfall is deficient only in the east and northeast region by 21% of the long period average. and petrol and diesel) moderated by 20 bps from 5. growing by 1. That said. albeit protein inflation remained in double digits .

2% on-year in May 2016. The increase in the MSP of cereals and pulses is close to 4-5% and 8-9%. Electricity sector growth.  Crude prices have risen by 30% since April. have tempered considerably.3%.9%) for the first time in seven months. Classification: INTERNAL 3 . inflation expectations.  The positive growth in manufacturing in May was on account of improvement in both the consumer oriented sector and industrial and investment oriented sectors with the latter displaying positive growth (0. The percentage of respondents expecting general prices to increase in the next three months and one year have reached the minimum level.9% in April.7%. we expect oil prices to remain contained at $4045/barrel in 2016. sowing as of July 1 is 15% below normal. the growth calculus remained almost same with both basic and intermediate goods continuing to do well whereas capital goods segment declining in May.  On the positive side. slowed down to 4.2% in May compared to -10. due to a slow start to the season. respectively. was half of that in April.8% in April). IIP Growth: Moves to positive zone as manufacturing claws back to positive territory  The Index of industrial production (IIP) recorded a growth of 1.the mainstay of IIP with ~75% weightage – which moved back to positive growth of 0. with June growth coming in at 1.8%). Other categories that continued to do well were medical precision and optical instruments. The upturn was on account of manufacturing sector . That said. The categories that displayed healthy growth in the consumer space were textiles (4.1%). basic metals (4. However. however. Mining sector continued its slow pace of improvement. machinery and equipment (14.1% growth).  According to use-based classification. as measured by the RBI’s inflation expectations survey. office accounting &computing machinery and paper products.8%) and fabricated metal products (6. it is 12% above normal in the peninsular region. after growing by 1.7% in June. on the other hand. This was on account of a healthy growth in consumer durables (6%) and a less sharp fall in consumer non-durables (-2. with coarse cereals and oilseeds taking the biggest hit. from an average 12% growth in the previous three months. The pace of fall in capital goods segment at 12. after declining consecutively in the previous two months. The key categories that contributed to the improvement in industrial and investment segment were chemicals (3.5%) and motor vehicles (5. We believe the rise in MSP will constrain pulses inflation (currently above 30%) even as the MSP increase across crops will not exert significant inflationary pressure. the benefit to inflation from the lower oil prices will decline this fiscal.Classification: INTERNAL India.3% (revised from -0.1% after declining by 1. Consumer goods grew by 1. respectively.1%).4%. However.8% earlier) in the previous month.  The government set a minimum support price (MSP) with a bonus price for pulses and oilseeds this year to boost production of these crops and narrow the demand-supply gap.

tobacco. and ‘petrol and diesel’. Source: CEIC. CEIC. Vegetable inflation jack up overall food inflation % Headline inflation Food inflation Core Inflation % Vegetables Pulses and products Meat and fish 50 20 18 40 16 30 14 12 20 10 10 8 6 0 4 RBI target of 4% 2 -10 Jun-16 Apr-16 Feb-16 Dec-15 Oct-15 Aug-15 Jun-15 Apr-15 Feb-15 Dec-14 Oct-14 Aug-14 -20 Jun-14 Jun-16 Mar-16 Dec-15 Jun-15 Sep-15 Mar-15 Dec-14 Jun-14 Sep-14 Mar-14 Dec-13 Jun-13 Sep-13 Mar-13 Dec-12 Jun-12 Sep-12 0 Source: MOSPI. CRISIL Research Figure 3: Rise in food inflation pushes up CPI Note: Food CPI excludes paan. prepared meals and beverages.Figures: CPI and IIP Figure 1: Headline CPI remains high in June Figure 2: Pulses. Core CPI excludes ‘food CPI’. CRISIL Research 4 . Central Statistical Office. ‘fuel and light’.

0 May-14 -5.0 5.0 May-14 -10.0 10.0 0.0 Industrial and investment oriented 5.0 20.0 Sep-14 -10. Note: All values in % y-o-y Figure 5: What the latest trend says about sectoral growth Source: CSO. Note: All values in % y-o-y Classification: INTERNAL 5 .0 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 Sep-14 Jul-14 May-16 Mar-16 Jan-16 Nov-15 Sep-15 Jul-15 May-15 Mar-15 Jan-15 Nov-14 -20. CRISIL Research.0 Jul-14 -15.0 -5.0 15.Classification: INTERNAL Figure 4: IIP – Performers and laggards IIP Overall Manufacturing Mining & Quarrying Electricity Consumer oriented 20.0 10.0 0. CRISIL Research.0 15.0 Source: CSO.

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