Macro Matters (August 2021)

macro banner Macro Matters (August 2021)

CPI Inflation for Jul-21 tapers by 67 bps to 5.59% as food prices ease

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Retail headline inflation for Jul-21 came in at 5.59% compared to 6.26% in Jun-21. The consensus estimate for retail inflation for Jul-21 was close to 5.80%, so it was actually better than estimates. The sharp fall in headline inflation in Jul-21 was driven lower by food inflation falling from 5.15% to 3.96%.

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Data Source: MOSPI

Broadly, there were 5 trends visible in the inflation numbers in July 2021.

  • Rural food inflation was the major driver as it fell from 5.02% to 3.55% in Jul-21. With the revival of monsoons in July, the impact was most visible in rural food inflation.
  • Core inflation (excluding food and fuel) has shown a downward trend in last 2 months falling from 6.40% to 5.97%. This needs to fall below 4% to help meet RBI target.
  • The sharp fall in food inflation was driven by vegetables dipping to -10.58%. However, inflation in meat, fish and eggs was sharply higher compared to June.
  • Fuel inflation at 12.38% and transport inflation at 10.54% continue to remain at elevated levels. The challenge is that both these have strong externalities and impact downstream inflation of goods and services in an intense way.
  • This is unlikely to impact the RBI stance on rates as the MPC has already confirmed that their approach to rate hikes would be determined less by inflation and more by growth.

IIP for Jun-21 bounces +13.6% as the base effect gradually appears to taper

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Index of industrial production (IIP) grew +13.6% for Jun-21 (IIP has 1-month lag). In Jun-20, IIP had contracted by a fairly steep -16.55%. On that low base, an IIP boost of 13.6% means that the IIP absolute levels are still -5.2% below pre-COVID levels of Jun-19. One thing is evident from the chart that the base effect is gradually waning in IIP numbers.

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Here is a quick look at 5 major takeaways from the Jun-21 IIP numbers.

  • One way to get a trend is to look at cumulative IIP for the Jun-21 quarter. While IIP for the quarter is up 45% on yoy basis, it is still -6.6% lower compared to Jun-19.
  • The 3 IIP components of mining, manufacturing and electricity grew on a yoy basis, but these components were lower compared to Jun-19; with manufacturing the worst hit.
  • While mining is the closest to the pre-COVID levels of IIP, electricity is still 2.57% short while manufacturing with 77.6% weightage, is 6.23% short of Jun-19 levels.
  • There is an important pointer to COVID 2.0 in the IIP numbers. In Mar-21, the IIP had gotten close to the 2019 levels. However, the impact of COVID 2.0 and the resultant lockdowns across India has resulted in industrial growth tapering once again.
  • At the current level of IIP, the RBI is unlikely to either tamper with rates or the liquidity infusion. With transmission at 87%, it is hoped that this should translate into higher IIP.

Trade deficit for Jul-21 widens to (-$10.97) billion on spike in oil imports

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Exports for Jul-21 touched a record level of $35.43 billion. However, with imports also spiking to $46.40 billion, the trade deficit actually widened to $10.97 billion. On a sequential basis, the merchandise exports and imports were higher. More importantly, total trade crossed the $80 billion mark first time since Mar-21; good news for MSMEs and for jobs.

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Here are 5 key things you should know about the July 2021 trade data.

  • Exports were up 9.02% sequentially while imports were up 10.82%, largely on the back of crude oil imports surging by more than $2 billion to $12.89 billion in Jul-21.
  • Among the major contributors to export growth were petroleum products, gems & jewellery and cereals. Exports of oilseeds, meat and tobacco were lower yoy.
  • The big takeaway is that exports are sharply up by 35% over Jul-19 showing that exports had overcome COVID impact and managed to even grow beyond that.
  • Overall deficit comprising merchandise and services widened in Jul-21 from $8.18 billion to $9.74 billion. That is 75% of the full year deficit for FY21 and is likely to impact the current account deficit for the fiscal year FY22.
  • While rising imports is an issue, the big news for July is that In-sourcing, Make in India and Atma Nirbhar Bharat have surely provided a boost to exports.

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