MACRO MATTERS – (CPI, IIP, TRADE)

Untitled 1 MACRO MATTERS – (CPI, IIP, TRADE)

CPI Inflation for Mar-21 trends higher to 5.52% as food and core inflation harden

Retail inflation or headline inflation for Mar-21 came in at 5.52% compared to 5.03% in Feb-21. The spike in headline inflation in Mar-21 was largely led by food inflation trending higher to 4.94%. Urban inflation is playing a much bigger part in Mar-21. In terms of headline inflation, urban inflation was at 6.52% while rural inflation stood at 4.61%. If you look at urban food inflation it stood at 6.64% while rural food inflation stood at 3.94%

Core inflation continues to worry the policymakers and also the markets in general. Core inflation represents the residual inflation left after food inflation and fuel inflation. Core inflation is non-cyclical and hence harder to control. In Mar-21, core inflation scaled still higher to 5.96% from 5.89% in Feb-21. This is the highest core inflation in the last 29 months. High core inflation is indicative of supply chain bottlenecks in the manufacturing process.

Food inflation has moved concurrent with overall inflation and that is understandable since food has 45.8% weight in the overall inflation basket. Food inflation rallied 298 basis points in the last 2 months from 1.96% to 4.94%. For example, Meat and Fish inflation were up in Mar-21 at 15.09% compared to 11.34% in Feb-21. Vegetable inflation rebounded to a level of -4.83% in Mar-21 compared to a level of -6.84% in Feb-21. Inflation in milk, pulses, and cereals was also higher on a sequential basis.

In its April monetary policy, RBI had subtly flagged off inflation risk. While growth was still the overriding concern for the RBI, the central bank underlined that it would not hesitate to hike rates and tighten liquidity if the problem of inflation persisted. In this context, what is material is not just the 5.52% headline inflation but the 5.96% core inflation. The RBI may look to tighten and hike rates if inflation stays above 6% for a few months in succession.

IIP for Feb-21 contracts further to -3.58% as manufacturing plays truant

The index of industrial production or IIP has now been negative in 3 out of the last 5 months and in 9 out of the last 13 months. For Feb-21, manufacturing stress led to the IIP slipping further to -3.58% as compared to -0.87% in Jan-21. IIP is reported with a 1-month lag. The

news on the previous IIP revisions has been favorable. For example, IIP growth for Jan-21 was upgraded from -1.60% to -0.87%, and IIP for Nov-20 got upgraded from -2.10% to -1.63%. Even as the aggressive implementation of the PLI scheme is giving some positive momentum, the concerns are on the pandemic lockdown and supply chain front.

There were IIP gainers and losers in Feb-21 with the bias tilted towards losers. Positive IIP growth was visible in Computer Electronics (+21.1%), Motor Vehicles (+4.9%), transport equipment (+3.5%) and electrical equipment (+3.2%). On the other hand, negative growth in IIP came from Recorded Media (-28.3%), Furniture (-19.0%), Apparel (-14.2%) and Beverages (-13.2%). The cumulative picture (Apr-Feb) 11-month period stood at -11.3%. For the Apr-Feb period, no segment showed positive growth; with the best-being pharmaceuticals contracting by -1.0%.

The IIP has a tendency to gravitate towards the Manufacturing Sector growth due to the substantial weightage of 77.64% that manufacturing has in the IIP basket. For Feb-21, the manufacturing contraction deepened to -3.65% compared to -1.21% in Jan-21. Power generation was the sole outperforming group in Feb-21 growing at +0.13% but even that was substantially lower than the electricity growth of 5.53% in Jan-21. Mining continued to be in the negative zone and widened from -2.49% in Jan-21 to -5.52% in Feb-21. Mining and manufacturing were hit by the lag effect of the lockdown plus supply chain bottlenecks created by the pandemic.

How long will the RBI continue to focus on growth over inflation? One thing is clear from rising bond yields that the markets are not willing to take the central bank assurance of sustained low rates at face value. That explains why the April monetary policy added a caveat that it would keep rates low to support economic revival as long as inflation does not pose a big problem. Growth will still be relevant to the MPC; but so, will inflation!

The trade deficit for Mar-21 at $14.11 billion despite the big boost to merchandise exports

The merchandise trade deficit for Mar-21 came in at $14.11 billion, steeper than the $12.61 billion deficit recorded in Feb-21. The surprising part is that the trade deficit was steeper in Mar-21 despite the exports growing 58.23% YoY and 21.73% on a sequential basis. After a long gap, Indian merchandise exports have shown a quantum leap to $34 billion, sharply higher than the median exports of the last few months.

Exports at $34.00 billion in Mar-21 showed a sharp boost on a sequential basis and a very sharp 58.3% on a YoY basis. Among star export performers, growth came from exports of Cereals (+323.65%), Oil Meals (+228.40%), and Iron Ore (+194.98%). But there were also a good number of laggards in an export performance like oilseeds (-6.60%) and cashew (-1.95%). For FY21, merchandise exports were down 7.40% at $290.18 billion compared to FY20.

Merchandise goods imports for Mar-21 stood at $48.12 billion compared to $40.54 billion in Feb-21. While imports were up 52.9% YoY, they were up 18.7% sequentially. With Brent Crude crossing $66/bbl, the oil import bill remains a big risk to the trade deficit. However, in the month of Mar-21, the big boost came from non-oil imports which grew 62% to $30.79 billion. Oil imports for Mar-21 were flat on a YoY basis but if you look at oil imports for FY21, they were down 37% at $82.25 billion due to a mix of weak demand and subdued prices.

Where did the import spurt come from? Let us look at the big import drivers over the last year. Gold (+584.21%), Sulphur & Pyrites (+464.22%), dyeing/tanning material (+106.87%), Textile Yarn (+92.11%) and chemical products (+82.61%) were the big contributors to the import growth. Some of the lagging segments included Silver (-90.22%), Newsprint (-50.66%) and Transport equipment (-32.73%). For FY21, the total imports were 18.07% lower at $388.92 billion.

The export thrust appears to have come from a mix of Chinese demand for minerals and the initial thrust to the PLI, apart from large consignments of pharmaceutical products going out of India. The leeway offered to freely export Agri-products has led to a big boost to the global sales of cereals and oil meals. The bigger challenge in FY22 will be to sustain exports at these levels if the FY22 target of 12.5% GDP growth has to be achieved.

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