Market Walk

Macro matters ( APR 2022 )

CPI Inflation for Apr-22 hardens by 84bps to 7.79% as food and core inflation spike sharply

Retail headline inflation, or CPI inflation, for Apr-22 came in at 7.79% compared to 6.95% in Mar-22. The Reuters consensus estimate for retail inflation for Apr-22 was close to 7.5%, so inflation was 29 bps higher than estimates. The spike in headline inflation in Apr-22 was driven by a spike in food inflation with core inflation touching 8-year highs.

Broadly, there were 5 trends visible in inflation numbers in April 2022.

  • Food inflation was the major driver rising by 72 bps from 7.68% to 8.40% sequentially. Rural food inflation at 8.38% has been constraining rural demand in a big way.
  • Core inflation (excluding food and fuel) was sharply higher in Apr-22 at7.24%; holding above 6% for 7th consecutive month.Downstream effects of oil was the big factor.
  • The spike in Apr-22 inflation can be partly attributed to the base effect which fell from 5.52% in Mar-21 to a level of 4.29% in Apr-2021, magnifying the yoy impact.
  • Fuel inflation at 10.80% and transport inflation at 10.91% have spiked sharply in April 2022 by over 300 bps as the price hikes in petrol and diesel started to take effect.
  • With the US inflation at 8.3% for Apr-22 and the Fed targeting another 175-200 bps rate hike by end of 2022, RBI has its task cut out. The RBI has already made an unscheduled 40 bps rate hike in May and the consensus is of another 100-125 bps by end of 2022.

IIP for Mar-22at+1.85%,but 2-year growth at 1.95% is the big positive takeaway

Index of industrial production (IIP)grew +1.85% for Mar-22(IIP has 1-month lag). InMar-21, IIP had expandedby 24.14%. On that expanded base, an IIP growth of 1.85% is positive as it also factors in the COVID effect into the calculations. But the big takeaway from the Mar-22 IIP data was the robust 12.5% growth in IIP on sequential month-on-month basis.

Here is a quick look at 5 major takeaways from the Mar-22 IIP numbers.

  • One way to catch a trend is to look at cumulative IIP for FY22. While IIP for the period is up 11.36% on yoy basis, it is up an encouraging1.95% compared to FY20.
  • The 3 IIP components of mining, manufacturing and electricity grew yoy for FY22, but againstFY20;manufacturing finally turned positive, albeit tepid at 0.98%.
  • High frequency month-on-month growth in IIP was 12.5% for Mar-22, with double digit growth across mining, manufacturing and electricity
  • While the long term risks to IIP are still there, the high frequency recovery in the IIP for Mar-22 shows that the Indian economy has shown resilience and has manged to come out of the lag effects of global events like Ukraine war, Fed hawkishness etc.
  • If one reads the fine print of the special MPC meet in May 2022, the 40 bps rate and 50 bps CRR hike show that RBI focus has already shifted from growth to inflation control.

Trade deficit for Apr-22 widens to(-$20.11) billion as oil imports plays spoilsport

Exports for Mar-22were sequentially robust at $40.19 billion, but imports were equally elevated at$60.30 billion. This led to the trade deficit widening to $20.11 billion. In Mar-22, we had reported about total trade crossing $1 trillion for the first time in FY22. Now, the risk is that in FY23, merchandise trade deficit could get close to $250 billion.

Here are 6 key things you should know about the April 2022 trade data.

  • The trade impact is visible from the fact that both exports and imports for April 2022 were more than 30% higher on yoy basis. Trade focus has surely worked.
  • Key contributors to export growth were petroleum products, electronic goods, cereals, coffee, leather products and tobacco. Exports of Iron Ore, Cashew and handicrafts fell.
  • Much of the import pressure came from oil, metals and fertilizers with crude oil imports in April 2022 crossing the $20 billion level for the first time ever.
  • Overall deficit comprising merchandise and services widened in Aprli-22to $8.08 billion. While this is just the first month, it hints at overall deficit of $100 billion for FY23.
  • Gold imports in April 2022 were 72% lower on a yoy basis, but it has increased 70% over the previous month, showing that cyclical demand for gold will continue to haunt.
  • The big challenge in the coming months for exports growth will be how the supply chain disruptions have an impact on trade routes and the availability of containers.
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