Nirmal Bang writes …CPI inflation stood at 3.3% in October 2018, down from 3.7% in the previous month.It was below our estimate of 3.70% and Bloomberg consensus estimate of 3.60%. The lower than expected reading was because of deflation in the food and beverage segment. Food and beverage inflation stood at -0.1% YoY in October 2018, down from 1% in the previous month. Prices of vegetables, dairy products and pulses declined over the month. Core inflation on the other hand accelerated to 6.2% YoY from 5.8% in the previous month on the back of higher than expected inflation in the heath, household goods and personal care segment. Higher goods and services inflation reflects the pass-through of higher input costs including rupee depreciation and higher import duties. With CPI inflation below the RBI’s 4% forecast , an extended pause is likely. However, the increase in core CPI warrants vigilance
IIP growth came in at 4.5% in September 2018, a tad lower than the revised 4.7% in the previous month. However, it was better than our estimate of 4% and Bloomberg consensus estimate of 4.3%. Manufacturing sector growth slowed to 4.6% from 5.1% in the previous month. Nevertheless, growth was largely stable with 16 of 23 manufacturing sectors registering positive growth, same as in the previous month. Export oriented sectors particularly textiles continued to reap benefits from a weaker Indian rupee and relatively robust global demand. On the other hand, capital goods production is seeing signs of a slowdown after a good run over the past 12-15 months. Electricity production rose 8.2% YoY, while mining grew 0.2%YoY.Manufacturing sector growth is likely to slow from November onwards due to tighter credit conditions, consumer uncertainty and slowdown in capital spending by the government to meet the fiscal deficit target and by the private sector ahead of elections.
My two cents
Lower Agri commodity prices and higher input price inflation are here to stay. The situation gets tricky because large part of rural India’s income is a derivative of Agri commodity prices. On the other hand rising input prices are already showing up in core inflation which cannot be passed on to the final buyer because debt fueled household consumption is slowing down and corporate profitability will be dented in coming quarters. Lower inflation should then at least be positive for Govt bonds, no not really because market is wary of depreciating rupee and it is a matter of time that we breach 8% on ten year bond.