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Inflation cooldown comes as a surprise; industrial output disappoints.


Date: 13-01-2021
Subject: Inflation cooldown comes as a surprise; industrial output disappoints
The middle of the month central data releases on January 12 were a mixed bag. While retail inflation for December came down to within the Reserve Bank of India’s (RBI's) medium-term inflation target after eight months, industrial production in November contracted after two months of expansion.

The Consumer Price Index (CPI)-based inflation for December came in at 4.59 percent, primarily due to a fall in food inflation. The last time inflation was below the Monetary Policy Committee’s (MPC's) inflation target range of 4 percent (+/-2 percent) was in March 2020. Since then, it has gone as high as 7.61 percent in October.

Food inflation was 3.41 percent in December compared to 9.5 percent in November. This was primarily due to vegetable inflation, which contracted by 10.4 percent last month.

“While we were anticipating a considerable base-effect-led correction in December 2020, the CPI inflation recorded a much sharper-than-expected deceleration, led by the substantial fall in vegetable prices,” said Aditi Nayar, Principal Economist with ICRA Ltd.

Nayar added that the CPI is expected to dip further in January before an uptrend February onwards.

“It is unlikely to prove adequate to allow for rates to be eased in the upcoming policy review, as the headline inflation may only record a limited further decline before resuming an uptrend,” she said.

Rahul Gupta, Head of Research-Currency at Emkay Global Financial Services, termed the December CPI print as a surprise. “With increase in crude oil prices and fears over bird flu, inflation may remain sticky for sometime. This may give the RBI some room to cut interest rates, but in our view, the central bank may continue its pause at the February’s policy and look out for more incoming data,” Gupta said.

The Index of Industrial Production (IIP) contracted by 1.9 per cent in November. The IIP had expanded in October and September after six straight months of contraction in the wake of the COVID-19 pandemic.

Analysts said this was a temporary blip.

“The year-on-year decline in industrial output seen in November 2020 is expected to be fleeting, with many lead indicators such as electricity demand, exports, ports cargo traffic and GST e-way bill generation portending a solid rebound in activity in December 2020,” said ICRA’s Nayar.

She said the contraction in the IIP in November 2020 was broad-based, with only electricity and infrastructure displaying a growth.

“With lead indicators such as electricity demand, exports, and GST e-way bill generation displaying a rebound in activity in December 2020, we anticipate a pickup in the IIP back to a growth of 2-4 percent in that month,” Nayar said.

Source:-moneycontrol.com

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