CPI, IIP review: RBI must watch out for inflation post June, factory output set to rise; here's why

The Central Statistics Office (CSO) today released numbers of Consumer Price Index (CPI) inflation for the month of May and Index of Industrial Production (IIP) for April. Both the macroeconomic indicators saw an uptick in their numbers. It needs to be noted that, performance was in line with analysts' expectations. Today, domestic indices continued to perform in positive note with Sensex ending at 35,692.52 above 209.05 points or 0.59%, whereas Nifty 50 finishing at 10,842.85 up 55.90 or 0.52%. Even Indian rupee finished on a good note by gradually strengthening against US benchmark dollar index. The rupee closed at 67.460 above 0.055 points or 0.08% against US dollar at interbank forex market. 

India's consumer price index (CPI) or retail inflation stood at 4.87% in the month of May 2018 - higher from 4.58% in April 2018 compared to 4.28% in March, 4.44% in February, and is moving towards 5.07% mark recorded in January 2018. Last year, CPI hovered near 2% to below 5%.

May 2018 CPI was also higher compared to 2.18% recorded in the corresponding month of the previous year. 

source: tradingeconomics.com

The Consumer food price index (CFPI) stood at 3.10% in May 2018 compared to 2.80% of April 2018. In the same month of previous year, CFPI stood in negative at 1.05%.

While India's Industrial Production or factory output came in at 4.9% for the month of April 2018. The indicator recorded a growth rate of 4.4% in March 2018 month, which was surprisingly quite lower compared to growth of 7% in February 2018. IIP has been deceleration after November 2017 where it recorded a growth of 5 year high which indicated that India is surpassing shocks of GST and demonetisation. 

source: tradingeconomics.com

Cumulative growth in IIP for the period April-March 2017-18 over the corresponding period of the previous year stands at 4.3%.

For CPI, Dr Soumya Kanti Ghosh, Group Chief Economic Adviser at State Bank of India (SBI) said, “As expected, CPI inflation increased moderately to 4.87% in May’18 from 4.58% in Apr’18, with increase in prices in clothing, fuel & light and miscellaneous group within which transport and communication witnessed a significant jump. Prices of food and beverages.”

Meanwhile, the Core CPI has increased further to 6.18% compared to 5.92% in Apr’18, getting a push from education and clothing and footwear. Rural inflation (4.88%) has again grown faster than urban inflation (4.72%).  

Core CPI internals for the 12 month period ended Apr’18 reveal Housing Rent, Tuition fees and Petrol for Vehicle are the top 3 contributors to core inflation.

Ghosh said, “ The monthly momentum of core CPI has slowed down significantly in May’18 and we expect it to decelerate rapidly post June. We expect RBI should watch out CPI numbers post June for more clarity before arriving at any rate decision in August.” 

In case of IIP, Ghosh explained, mining, scientific instruments/ apparatus for drawing, calculating and measurement, commercial vehicles, sugar and cement were the chief positive contributors to IIP growth whereas gold jewellery, copper rods, wires and bars, telephone and mobile instruments, readymade garments and air filters were major negative contributors. 

Explaining the outlook, Ghosh said, “Going forward IIP is likely to remain on the higher side for next 2 months owing to the base effect. A clearer picture should emerge post June, when the IIP series will be devoid of any base impact.”

Ghosh added, “ We foresee an investment recovery in H2FY19, once consumption growth gains momentum.”