Drop in Retail Inflation, IMF Bullish on Indian Markets

On 12th October, 3 important macro data points were out in the market. The first two were domestic; consisting of September Inflation and August IIP. The third data point pointed to IMF estimates of India’s GDP growth.
 

How did retail inflation and IIP growth pan out?

Let us look at inflation first and then turn to IIP growth.

a) Retail inflation, or headline inflation, for Sep-21 fell to a 5-month low level of 4.35%. It was last at 4.29% in Apr-21. Inflation has fallen nearly 200 bps from 6.40% in May-21.

b) The sharp fall in food inflation from 3.11% in August to 0.68% in September triggered the fall in headline inflation. Most food items dipped lower on record Kharif and good Rabi promise.

c) Core inflation, which is structural inflation excluding food and oil, stayed elevated at 5.77%. The fall in inflation in Sep-21 was largely food driven with non-food items still running high. 

d) With Brent Crude at $84/bbl, fuel inflation is at 13.5% and Transport inflation above 9.5%. These remain the big risks, more so because they have strong spill over effects on other items. 

Check - Crude Oil at $75/bbl – Here comes inflation

e) Industrial of industrial production or IIP growth for Aug-21 came in stable at 11.86% as compared to 11.5% in July. This data is YOY and comes with a one-month lag.

f) The growth in IIP has sustained at 11.86% despite the base effect of low IIP waning. So, this is more of genuine growth in output that is visible this time around. 

g) The 2-year IIP growth (pre-COVID versus post-COVID) is finally positive at 3.88% and is a signal that the IIP has overcome the pressures created by COVID-19 and COVID 2.0.

h) High frequency indicators like GST, e-way bills and freight are robust but manufacturing IIP is yet to catch up with the pace of growth of mining and electricity.

The moral of the story is that the RBI may finally take comfort from the fact that IIP is back to durably normal levels. Hence soft rates and accommodative stance to boost growth may not be the need of the hour any longer. Now the action will purely shift to inflation as a deciding factor in RBI monetary policy.

What IMF said about India’s growth for 2021 and 2022?

According to the latest IMF report, Indian economy was projected to grow at 9.5% in calendar 2021 and at 8.5% in calendar 2022. Interestingly, the IMF has lowered the 2021 growth projections for the world economy from 6% to 5.9%. For China, the growth projections are lowered from 8.1% to 8% while US growth has been cut sharply from 7% to 6.1%.