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Edelweiss Investment Research

Economic Spotlight

Consumer Inflation Nosedives, Industrial Production Chugs Along

Sahil Kapoor Consumer Inflation Nosedives, Lowest In This Decade


Chief Market Strategist
sahil.kapoor@edelweissfin.com Consumer price inflation fell to 2.18% in May, nearly 30 bps lower than consensus estimate of 2.48%
+91 (22) 4088 6044 and 80bps from the last reading in April17. What is interesting, is barring pan & tobacco and housing
goods & services, each segment of CPI registered de-growth. Food inflation slowed significantly
Shobana Krishnan
entering disinflationary trend (-20bps in May17), the lowest in recent memory. Core CPI ( Ex food and
Economist
shobana.krishnan@edelweissfin.com fuel) slowed markedly to 4.23% indicating slack in the economy. As price effects wane we expect
+91 (22) 4272 2636 inflation to gradually move higher over the course of next few months.

Vegetables And Pulses, Disinflation Intensifies


Food inflation has entered the negative zone for the first time since January 2012. Vegetables and
pulses price inflation decelerated further de-growing (13.4%) and (19.5%) respectively. On a 3MMA
basis the vegetable price inflation is approaching levels of (-10%) one of the sharpest levels of de-
growth in last few decades. Trend of pulses (basis 3MMA) is even more glaring at (-16%). The fuel &
light group recorded a fall in inflation to 5.5 per cent from 6.1 per cent in the previous month.

Sharp Decline In Core Inflation To Raise Clamour For Rate Cuts


While headline inflation inched down, core inflation too slowed to 4.23% (y-o-y). Real interest rates
now appear exceedingly stretched at nearly 3.5% to 4%. However the weakness in various inflation
components is approaching a fag end. Unfavorable base effects caused by the drop in food prices in
the second half of last year will push food inflation higher from July onwards. Given the recent
announcements regarding waiver of farm loans and recent tightness in capacity utilization levels for
certain industries price pressure could get a boost. This means that if RBI chooses to cut rates in the
next policy meeting it could be doing so in a relatively unfavourable period.

In Conclusion we believe inflation is likely to rebound from July onwards but is also expected to
remain below the 4% target for RBI for H1FY18. For RBI to cut rates a deeper cut in inflation is needed
in June 17.

CPI , Core CPI & Major Heads (YoY, % Chg)


9.00 9.00
8.00 8.00
7.00 7.00
6.00 6.00
5.00 5.00
4.00 4.00
3.00 3.00
2.00 2.00
1.00 1.00
- -
Feb-16

Apr-16

Sep-16

Feb-17

Apr-17
May-16

Aug-16
Jun-16

Jul-16
Mar-16

Nov-16

Dec-16

Jan-17

Mar-17
Oct-16

CPI Food and beverages


Fuel & light Core - CPI Ex Food and Fuel
RBI Target for 2018
th
Date: 12 June 2017 Source: MOSPI, Edelweiss Investment Research.

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CPI Table
YoY growth Weights May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16

CPI 100 2.18 2.99 3.81 3.65 3.17 3.41 3.63 4.20 4.39 5.05 6.07

Food and beverages 45.9 -0.22 1.21 2.54 2.46 1.29 1.98 2.56 3.71 4.12 5.83 7.96

Pan, tobacco and intoxicants 2.4 6.17 6.05 6.23 6.18 6.36 6.39 6.29 7.09 6.82 6.86 6.83

Clothing & footwear 6.5 4.41 4.58 4.60 4.38 4.71 4.88 4.98 5.24 5.19 5.21 5.23

Housing 10.1 4.84 4.86 4.96 4.90 5.02 4.98 5.04 5.15 5.18 5.29 5.42

Fuel & light 6.8 5.46 6.13 5.56 3.90 3.42 3.77 2.80 2.81 3.07 2.49 2.75

Miscellaneous 28.3 3.81 4.25 4.78 4.79 5.06 4.73 4.83 4.58 4.51 4.18 4.01

Core - CPI Ex Food and Fuel 47.3 4.23 4.52 4.87 4.83 5.07 4.89 4.97 4.92 4.86 4.69 4.62

RBI Target for 2018 4.00 4.00 4.00 4.00 4.00 4.00 4.0 4.00 4.00 4.00 4.00

YoY growth Weights May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16

Food Inflation 39.06 -0.22 1.21 2.54 2.01 1.29 1.98 2.56 3.71 4.12 5.83 7.96
-Cereals and products 9.67 4.81 5.06 5.38 5.3 5.23 5.25 4.86 4.4 4.17 4.11 3.88
-fish and meat 3.61 1.87 1.9 2.96 3.5 2.98 4.79 5.83 6.16 5.83 6.01 6.57
-Egg 0.43 0.72 3.44 3.21 0.54 2.64 6.41 8.55 9.42 9.94 9.58 9.34
-Milk and products 6.61 4.56 4.74 4.69 4.22 4.23 4.4 4.57 4.42 4.27 4.36 4.13
-Oils and fats 3.56 2.7 3.14 3.76 3.83 3.12 2.86 2.7 3.8 4.65 4.94 4.96
-Fruits 2.89 1.4 3.78 9.35 8.33 5.81 4.74 4.6 4.42 6.07 4.46 3.53
-Vegetables 6.04 -13.44 -8.59 -7.24 -8.29 -15.62 -14.59 -10.29 -5.74 -7.21 1.02 14.06
-Pulses and products 2.38 -19.45 -15.94 -12.42 -9.02 -6.62 -1.57 0.23 4.11 14.33 22.01 27.53
-Sugar and condiments 1.36 9.84 11.37 17.05 18.83 18.69 21.06 22.4 23.62 25.77 24.75 21.91
-Spices 2.5 0.52 1.71 2.99 3.82 5.04 6.06 6.48 7.4 8.1 8.91 9.04

YoY growth Weights May-17 Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16

Total Miscellaneous Inflation 28.32 3.81 4.25 4.78 4.79 4.98 4.73 4.83 4.58 4.51 4.18 4.01
-Household goods and
3.8 3.97 3.9 4.08 4.09 4.19 4.53 4.21 4.39 4.32 4.51 4.62
services
-Health 5.89 3.8 3.98 3.99 4.00 4.18 4.53 4.55 4.73 4.67 4.61 4.54
-Transport and
8.59 3.46 4.01 6.04 5.39 5.31 4.04 3.77 3.41 2.7 1.16 1.06
communication
-Recreation and amusement 1.68 3.46 3.3 3.57 3.57 3.67 3.85 4.03 4.04 3.97 4.24 4.44

-Education, stationery etc. 4.46 4.9 5.32 5.2 5.37 5.54 5.47 5.15 5.16 4.93 5.2 5.14

-Personal care and effects 3.89 3.27 4.23 4.52 5.15 6.29 6.51 7.73 7.2 7.67 8.28 7.3

Source: MOSPI, Edelweiss Investment Research

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IIP Marginal Imporvement, Broader Activity Still Subdued
Industrial Production increased to 3.1% in April after rising 2.7% in March. Mining activity continues to
remain above trend growing at 6.2% in April on a 3 month moving average (3MMA) basis. This is higher by
the headline industrial production by 360 bps (basis 3MMA). Going ahead we expect IIP to trend towards 5%
as motor vehicles, consumer durables make a comeback and electricity and mining continue to clock decent
growth.

Manufacturing has been the biggest drag on the industrial production since demonetization. Food products,
Beverages, electrical equipments and paper products have been the laggards showing below trend growth in
the subdued manufacturing sector. Interestingly motor vehicles have seen a rebound in production. But
following the declining demand trend in a number of commercial vehicle segments the motor vehicle
component de-grew (15.6%) in April17.

Electricity growth seems to be on a revival path after a lull in Feb17. This has been a key area of focus for the
government and is expected to continuously contribute positively in the revival of industrial production. In
the month of April the electricity growth slowed by nearly 80bps to 5.4% and stands at 4.3% on a 3MMA
basis.

On the basis of usage consumer goods has seen mixed trends. Consumer durables which were contributing
positively towards the industrial production have moved to the negative territory after demonetization and
have remained there. On the 3MMA basis the consumer durables category is de-growing by (3.2%) while the
non-durables are growing at nearly +9.6%. With a rebound in high frequency indicators we expect this to
change over the course of next few months.

IIP by Economic Activity (YoY, % Chg)


15.0 15.0
13.0 13.0
11.0 11.0
9.0 9.0
7.0 7.0
5.0 5.0
3.0 3.0
1.0 1.0
-1.0 -1.0
-3.0 -3.0
-5.0 -5.0
Feb-16

Apr-16

Sep-16

Feb-17

Apr-17
May-16

Aug-16
Jun-16

Jul-16
Mar-16

Nov-16

Dec-16

Jan-17

Mar-17
Oct-16

IIP Mining & quarrying Manufacturing Electricity

Source: MOSPI, Edelweiss Investment Research

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IIP - Table
Month Weights Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16
IIP 100.0 3.1 2.7 1.9 3.9 2.6 5.7 4.9 5.7 4.9 5.2 8.9
Mining & quarrying 14.4 4.2 9.7 4.6 8.6 10.8 8.2 1.0 -1.2 -4.3 0.9 10.2
Manufacturing 77.6 2.6 1.2 1.4 3.0 0.9 4.9 5.9 6.7 6.6 6.3 8.6
Electricity 8.0 5.4 6.2 1.2 5.2 6.4 9.5 3.0 5.1 2.1 2.1 9.8

Month Weights Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16

Manufacturing Total 77.6 2.6 1.2 1.4 3.0 0.9 4.9 5.9 6.7 6.6 6.3 8.6

Food products 5.3 -4.4 -10.2 -15.4 -8.9 -7.9 0.3 -1.6 -3.7 -4.0 4.8 3.6

Beverages 1.0 -19.2 -13.9 -13.4 -26.1 -9.1 -4.3 -1.9 6.4 13.0 6.2 -0.1

Tobacco products 0.8 17.9 -21.3 -35.8 27.5 0.4 0.5 4.2 -0.3 -17.5 -16.6 -9.3

textiles 3.3 2.1 -0.3 -2.2 -2.1 -5.6 2.7 -5.5 -3.6 -2.8 -0.9 2.7

Wearingapparel 1.3 0.8 -12.7 6.9 12.4 0.9 8.0 8.7 39.4 45.2 29.2 31.8

Leather and related products 0.5 1.9 1.1 -10.4 -12.7 -16.0 4.0 -2.1 9.0 8.5 2.3 2.7

Wood and products of wood (ex Furniture) 0.2 -5.8 2.0 -10.1 -5.1 -9.3 -4.4 -14.4 -4.2 -3.9 -8.5 -1.7

Paper and paper products 0.9 -0.6 -7.7 -7.7 -1.9 -8.7 -7.4 -9.1 -1.2 5.4 5.2 5.5
Printing and reproduction of recorded
0.7 1.1 -0.8 -2.2 10.0 8.2 12.9 -2.0 -7.0 2.8 0.0 -1.7
media
Coke and refined petroleum products 11.8 1.5 2.3 -2.9 -1.8 5.1 0.4 15.0 5.4 0.9 11.7 5.0

Chemicals and chemical products 7.9 0.7 -0.7 3.3 1.6 -2.0 4.7 1.4 0.2 6.5 -1.2 4.3
Pharmaceuticals, medicinal chemical and
5.0 29.1 38.6 59.3 43.0 15.8 9.5 21.8 38.4 37.7 45.5 32.9
botanical products
Rubber and plastics products 2.4 0.6 0.2 -4.2 -4.7 2.3 9.0 8.5 3.8 -2.9 -3.7 4.8

Other non-metallic mineral products 4.1 -1.5 -4.1 -12.8 -11.6 -8.1 1.2 2.8 5.3 4.0 3.1 10.0

Basic metals 12.8 7.4 -0.9 2.5 8.3 9.5 4.9 9.8 9.4 7.8 0.2 5.4
Fabricated metal products, except
2.7 -6.2 -4.7 -8.6 -5.7 0.6 -3.5 -12.0 -2.0 4.0 4.4 18.8
machinery and equipment
Computer, electronic and optical products 1.6 1.9 11.5 0.1 5.4 -7.8 6.2 -6.3 3.2 8.9 -0.9 2.2

Electrical equipment 3.0 -14.4 -17.1 -13.0 -9.3 -11.1 -2.4 -3.1 5.6 0.9 -9.1 -3.1

Machinery and equipment n.e.c. 4.8 9.5 -2.0 2.8 4.7 3.7 15.5 0.9 -8.0 -1.4 18.0 20.5

Motor vehicles, trailers and semi-trailers 4.9 -15.6 8.5 1.9 2.3 -6.1 23.2 11.6 9.4 13.2 5.1 13.8

Other transport equipment 1.8 7.8 5.8 -6.5 -10.0 -20.9 5.1 4.4 17.9 17.6 2.6 12.9

Furniture 0.1 -5.1 -7.2 12.0 6.3 14.1 42.3 15.4 12.5 13.4 -16.1 -7.2

Other manufacturing 0.9 8.4 15.1 1.6 7.5 5.6 -5.3 2.3 16.9 -17.3 -1.7 -4.2

Weights Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16

IIP 3.1 2.7 1.9 3.9 2.6 5.7 4.9 5.7 4.9 5.2 8.9
Primary goods 34.1 3.4 5.7 0.8 3.8 7.4 5.5 5.2 2.2 -1.0 4.2 8.2
Capital goods 8.2 -1.3 -1.0 -3.1 -0.4 -6.1 5.4 -4.7 -7.5 0.6 8.3 14.3
Intermediate goods 17.2 4.6 -1.4 2.2 3.2 2.1 5.7 4.7 1.9 4.6 2.4 6.2
Infrastructure/
12.3 5.8 0.8 -2.0 2.6 5.5 3.9 7.4 8.7 6.5 -0.9 6.6
construction goods
Consumer goods 28.2 1.8 3.7 5.4 5.8 -1.3 6.8 6.2 14.1 12.5 10.4 11.0

Weights Apr-17 Mar-17 Feb-17 Jan-17 Dec-16 Nov-16 Oct-16 Sep-16 Aug-16 Jul-16 Jun-16

Consumer goods 28.2 1.8 3.7 5.4 5.8 -1.3 6.8 6.2 14.1 12.5 10.4 11.0

Consumer durables 12.8 -6.0 -0.8 -2.9 -1.1 -4.3 10.9 5.3 14.3 12.2 4.9 9.5
Consumer non-
15.3 8.3 7.6 12.4 11.5 1.1 3.6 6.9 14.1 12.7 15.5 12.4
durables

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