Macro Matters (October 2021)

macro banner Macro Matters (October 2021)

CPI Inflation for Sep-21 tapers by 95 bps to 4.35% as food inflation falls sharply

Retail headline inflation, or CPI inflation, for Sep-21 came in at 4.35% compared to 5.30% in Aug-21. The consensus estimate for retail inflation for Sep-21 was close to 4.50%, so it was significantly lower than estimates. The 95 bps fall in headline inflation in Sep-21 was driven predominantly by food inflation falling from 3.11% to 0.68%.

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Broadly, there were 5 trends visible in inflation numbers in September 2021.
1. Food inflation was the key driver pushing headline inflation lower as a record Kharif output and an aggressive MSP support by government ensured adequate food supply.
2. Core inflation (excluding food and fuel) has shown a downward trend in last 4 months falling from 6.40% to 5.77%. Of course, fuel remains a key risk due to externalities.
3. To an extent, this sharp fall in the headline inflation can be attributed to the base effect as most economists are expecting inflation to revive once again by December.
4. Fuel inflation at 13.5% and transport inflation at 10% continue to remain at elevated levels. That may see little respite due to Brent crude staying above $84/bbl consistently.
5. With growth getting back above pre-pandemic levels, inflation could become the real driver of RBI monetary tightness and of rate hikes in the future. RBI is likely to track the US inflation also, apart from India inflation as a signal for future monetary stance.

IIP for Aug-21 comes in higher at +11.86% as the base effect faded but growth remained robust

Index of industrial production (IIP) grew +11.86% for Aug-21 (IIP has 1-month lag). In Aug-20, IIP had contracted by a fairly steep -7.13%. On that low base, an IIP boost of 11.86% means that the IIP absolute levels are now 3.88% above pre-COVID levels of Aug-19. After a gap of 2 years, the growth above pre-COVID levels has finally begun.

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Here is a quick look at 5 major takeaways from the Aug-21 IIP numbers.
1. One way to catch a trend is to look at cumulative IIP for the Apr-Aug period. While IIP for the period is up 28.64% on yoy basis, it is still -3.52% lower compared to 2019 period.
2. The 3 IIP components of mining, manufacturing and electricity grew on a yoy basis for Apr-Aug, but against 2019; mining and electricity were up but manufacturing is lower.
3. Compared to the month of Aug-19, mining is up 12.82% and electricity is up 13.89%, showing decisive recovery. Even, manufacturing is up 1.25% over Aug-19 levels.
4. The base effect has seen its last lag in August and post that, the growth will have to come on its own merit. However, it is likely that supply constraints of coal and microchips could disrupt the recovery in IIP over pre-pandemic levels.
5. If the next month also gives positive growth indications, then inflation will shift to be the real driver of RBI monetary policy in the coming months and quarters.

Trade deficit for Sep-21 widens to (-$22.60) billion on spike in import bill

Exports for Sep-21 were marginally higher at $33.79 billion MOM. However, with imports spiking to $56.39 billion, the trade deficit widened sharply to $22.60 billion. On a sequential basis, the merchandise exports were up 1.53% while imports were up 19.75%. Total trade crossed the $90 billion mark for the first time ever, which is good news for SMEs and jobs.

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Here are 5 key things you should know about the September 2021 trade data.
1. Exports were up 1.53% sequentially while imports were up 19.75%, largely driven by a spike in the imports of crude oil and gold, apart from engineering goods.
2. Among major contributors to export growth were coffee, petroleum products, cotton yarn, engineering goods and chemicals. Exports of Iron Ore, Oil meals and oilseeds fell.
3. The big takeaway is that exports are sharply up by 29.86% over Sep-19 showing that exports had overcome COVID impact, but imports over 2 years also surged 49.59%.
4. Overall deficit comprising merchandise and services widened in Sep-21 from $17.26 billion to $28.63 billion. That is more than twice the full year deficit for FY21 at $12.75 billion; which is not great news for the current account balance in FY22.
5. The concerns are that gold imports are sharply up in Sep-21 at $5.15 billion while China accounts for 40% of the merchandise trade deficit in the first 9 months of 2021.

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