Inflation under control, but IIP growth remains the challenge

During the week, the MOSPI announced two important data points. Inflation came in at 3.77% marginally higher than the 3.69% announced in the month of August. IIP growth, on the other hand, came in sharply lower at 4.3% in August. This is nearly 200 basis points lower than the IIP growth reported in the months of June and July this year. What are the take-aways?

Inflation looks under control

The Monetary Policy Committee has been repeatedly stressing the need to maintain a hawkish stance to curb inflation. The good news is that for the second successive month, the CPI inflation has stayed below the RBI benchmark of 4%. That is well within the comfort zone and does not call for further rate hikes by the RBI. Secondly, this has happened in a month when the first signs of a higher Kharif MSP are already visible. The food inflation has gone up and so has the fuel driven inflation. However, despite these factors the CPI inflation has stayed within the 4% range. To an extent, this fall in inflation has been possible because the pre-emptive rate cuts of 50 basis points by the RBI in June and August. It has managed to quell retail inflation in a big way. The only area of concern is that the government has now also fixed generous MSP for Rabi crops so the challenge of food inflation should sustain through the winter season. That would be something to watch out for.

IIP is struggling; just a bit

The disappointment during the month came from the IIP front. At 4.3%, the IIP for August is nearly 200 points below the figure touched in June and July. What was more disappointing was the manufacturing growth that came in at just 4.6% after flattering for the last few months. However, this could be more due to the base effect and also because erratic monsoons had actually disrupted production in some key states. This could be one of the reasons for the IIP struggling a bit this time around. Once the base effect is taken care of, it remains to be seen what happens. However, one only needs to be cautious of the impact of the trade war between the US and China. It is already estimated by IMF that this could result in a compression in global growth.

RBI: still hawkish?

Will this really impact the stance of the RBI? The RBI already gave the first signal by maintaining status quo in its October policy despite a rate hike by the Fed in September. With CPI inflation well below the comfort zone of 4% and the IIP struggling to grow, the RBI has reasons to keep status quo for some time to let IIP take off. The first two rate hikes appear to have worked fine in containing inflation. The RBI may have reasons to maintain status quo in December. Of course, a lot could also depend on the INR movement!