How the CPI and IIP data point towards a likely rate cut by RBI
The Ministry of Statistics and Program Implementation (MOSPI) announced the CPI inflation and IIP growth during the week. While the CPI inflation came in slightly above expectations, the IIP growth continued to disappoint. What are the highlights of these macro numbers and what do they portend for the RBI decision on repo rates when the MPC meets up August?
Inflation edges higher
CPI inflation for June 2019 came in at 3.18% nearly 14 bps higher than the inflation reported in the month of May. The retail inflation has been on a steady uptrend over the last 5 months, though it still remains well within the RBI comfort level of 4%. For the month of June, the rise in CPI inflation came from a sharp rise in food inflation from 1.83% in May to 2.17%. This has been a consistent trend and is partially explained by the better MSP for farmers and partially by the base effect of last year. However, the good news is that the core inflation continues to trend lower. The big worry for the CPI inflation in the coming months is that the Union Budget has increased the excise duty on petrol and diesel and has also imposed infrastructure cess of 1%. This had led to an immediate increase in fuel prices. With the tensions in the Middle East on a boil, the oil inflation remains the big risk to the overall price levels. The food inflation trajectory will also depend on the monsoons!
IIP growth falters again
The index of industrial production (IIP) for the month of May 2019 came in at 3.1%. This is lower than the growth recorded in the month of April and also the corresponding period last year. The IIP growth saw pressure on mining and manufacturing front. As manufacturing accounts for 77% of the IIP basket, the correlation is almost direct. Weakness in manufacturing is largely due to low capacity utilization, weak global and domestic demand and liquidity stress across key sectors like auto and FMCG. The impact on the consumer sector demand clearly underlines the reasons for the sharp fall in the IIP. This needs to be tracked closely as the IIP also has a primary and secondary impact on the overall GDP growth next quarter.
What does the RBI do now?
Markets are rife with expectations of another rate cut by the RBI in August. In June the RBI had cut rates by 25 bps to 5.75% and that just about implied an effective rate cut of 25 bps in the last one year. The rate cuts of February and April were neutralized by the two rate hikes last year. The RBI needs to cut rates to bring real rates of interest down and to help reduce the cost of funds for borrowers. With the Fed also giving a dovish outlook, the RBI may not have much to worry on the maintenance of yield spreads. The RBI language may matter more than the rate action!