CPI inflation ticks up, production slows - DBS Asian Currency Research

Friday's numbers pointed to an unfavourable mix of growth and inflation trends. Jan's CPI inflation exceeded expectations, while Dec's industrial production contracted for a second consecutive month. WPI inflation due today is expected to return to black after consistently declining for more than a year. Jan CPI Inflation ticked up to 5.7% YoY (vs consensus 5.4%) from 4Q15's 5.3%,led primarily by higher food costs.

Food price inflation jumped to 6.8% YoY from 4Q's 6%. Contrary to expectations, price pressures from vegetables, protein sand pulses remained firm on the year. Service sector inflation inched up to3.9% from 4Q's 3.7%, with base effects lifting the Transport and communication sub-component despite the sharp drop in global crude prices in the period. Core CPI stabilised at 4.7% YoY, holding below the 5% mark for more than a year, but off the 3Q15 trough. Despite the modest upside surprise in Jan's CPI reading, readings are trending below the central bank's target of 6% for this quarter.

That said, the RBI is likely to shift focus towards the FY16/17 price trends, where the upcoming public sector wage bill and pension scheme could disrupt the disinflationary phase inFY16/17 and keep the Mar17 target of 5% out of reach. With fading incremental boost from low crude prices, the fiscal backdrop is also a lot more challenging.

We expect the central bank to await budget cues, especially monitor the targets and consider the rationale of any adjustments. If the additional fiscal room(higher deficit) is channelled towards higher capex spending and improvement in revenue collections, the RBI would likely take a favourable view and keep the door open for further easing in Mar Apr.

Out simultaneously, Dec IP declined 1.3% YoY (consensus: -0.5%) from Nov's revised -3.4%. Lingering impact from heavy floods in the southern part of the country and slowing external demand depressed industrial activity towards end-15. India is not alone in this respect as along with India's, the global manufacturing PMI also extended its downturn towards late-2015, reflecting somber demand conditions. Mining and electricity generation improved slightly but manufacturing output declined for a second consecutive month. On the use-based end, capital goods plunged 20% YoY pulling down 4Q's output to -9%, pointing to weak investment-related demand.

At the margin, the cable/rubber insulated sub-component continues to sharply influence the headline. Consumer durables turned in strong 16.5% with base effects magnifying the pick-up, while non-durables continued its weak-run, reflecting subdued rural demand. Overall, most industrial sector indicators point to a loss in momentum towards the end of 2015, with the outlook unlikely have improved much in 1Q16 in midst of heightened global uncertainty and moderation in global demand conditions.

Source : Equity Bulls

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