Inflation trajectory may moderate over the next few months - the IIP data on a YoY basis look very strong

Suman Chowdhury, Chief Analytical Officer, Acuité Ratings & Research comments on the CPI June 2021 and IIP May 2021

CPI June 2021

"The CPI inflation has been stable at around 6.3% in Jun-21 which is almost similar to that in May-21, highlighting the presence of broad based inflationary pressures. Despite the benign vegetable prices where inflation print has been (-)0.7%YoY, the food and beverages inflation at 5.58%YoY continues to be pulled by protein categories. While egg prices have risen by 19.3% and pulses by 10.0% in Jun-21 vs Jun-20, the sharpest rise has been in edible oil at 34.8%. The monsoon forecasts continue to be favourable but any slippages in the rainfall patterns may increase price risks in some of the food categories particularly in a scenario where milk prices have already been increased. Further, the core inflation continues to be high with the additional push from increased retail fuel prices as well as the pass through of increased manufacturing costs, reflected in the WPI data.

Although we continue to have an expectation that the CPI inflation trajectory may moderate over the next few months with the ease of supply constraints along with the favourable impact of a timely monsoon on overall food prices, we have increased the average CPI inflation forecast to 5.5% for FY22. However, the regulatory tolerance on inflation will continue to be higher in the current context given the priority accorded to the revival of the growth impulses. In case of any unexpected overheating on inflation, we also expect the government to take suitable measures to control prices of food products and retail fuels to mitigate any longer term structural risks to inflation."

IIP May 2021

"On expected lines, the IIP data on a YoY basis look very strong since the industrial sector has aligned itself to operate in a restrictive environment in May-21 vs May-20. While the overall IIP grew by 29.3%YoY, the manufacturing sector grew at a higher 34.5%YoY. However, the figures look weak on a sequential basis with a contraction in output in almost all sectors in May-21 vs Apr-21 except mining where there has been a modest 0.6%MoM. Such a weakness in industrial production was expected in the background of the severe second Covid wave which had intensified further in May, leading to more stringent lockdowns as compared to April. Clearly, the nascent momentum in IIP seen over Q3/Q4 of FY21 has received a set back in April-May but a rapid taper down of the daily infection numbers and the expected progress in vaccination, have raised hopes for a quick rebound of the IIP trajectory from Q2FY22."

Source : Equity Bulls

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