India’s industrial output slowed down to 29.3% in May’21, led by manufacturing and electricity. Over a 2-year horizon, it has contracted by 13.9% led by capital goods and durables. CPI inflation for Jun’21 eased to 6.26% in Jun’21 with core inflation moderating to 6.2% from 6.5% in May’21. However, food inflation increased to 5.1%, up by 10bps MoM. The supply-side pressure on the core is likely to continue. Food inflation is expected to be soft, but below normal monsoon is a risk.
IIP growth eases: Industrial output increased by 29.3% in May’21 from 134.4% in Apr’21. Over a 2-year horizon, IIP has fallen by 13.9% led by a 16.4% decline in manufacturing and 8.5% dip in electricity output. This is in sharp contrast to Apr’21 when over a 2-year horizon, IIP was resilient. The decline in production in May’21 is attributable to restrictions imposed in the wake of the second wave. The decline in industrial activity over a 2-year horizon is driven by capital goods (-37% over May’19) and consumer durables (-41% over May’19). This is in sharp contrast to non-oil-non-gold imports which increased by 11.3% over a 2-year horizon in Jun’21 thus indicating a pick-up in domestic demand.
Food inflation inches up slightly: CPI inflation moderated slightly to 6.26% in Jun’21 from 6.3% in May’21. However, food inflation edged up to 5.1% from 5% led by eggs (19.4% from 15.2%), milk (1.9% from 0.6%), oils and fats (34.8% from 30.9%), vegetables (-0.7% from -1.9%) and pulses (10% from 9.4%). On the other hand, cereals (-1.9% from -1.4%) and meat and fish (4.8% from 9.1%) moderated. While government has reduced custom duty on edible oils, the lull in monsoon rain is a cause of worry which may push food prices higher.
Core inflation falls: Core inflation softened to 6.2% in Jun’21 from 6.5% in May’21. This was led by housing (3.7% from 3.9%), health (7.7% from 8.4%), transport and communication (11.6% from 12.4%), recreation and amusement (5% from 6.1%) and personal care and effects (4.8% from 7.4%). A part of the decline is also attributable to the base effect as last year, core inflation increased by 40bps MoM. Even so, the cost-push in core inflation is likely to continue with the pass-through of international crude prices being visible in domestic prices. Higher domestic retail oil prices imply an increase in logistics costs a well. In addition, domestic manufacturing firms are yet to accomplish a complete pass-through of higher raw material costs.
We continue to expect retail inflation at 5.5% in FY22 led by higher core inflation at 6.1%. The monsoon is now below normal and poses an upward risk to our inflation estimate. We expect RBI to normalize monetary policy in Q4FY22 by reducing the wedge between reverse repo and repo rate and changing its liquidity stance.
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