IIP & CPI First Cut: Mild, yet positive surprise from inflation and IIP

IIP & CPI First Cut: Mild, yet positive surprise from inflation and IIP

Retail inflation rose to 5% in December, albeit lower than expected. As the base effect wore off, food inflation edged up a notch while core inflation continued to decline.  With the inflation readings coming in the comfortable zone, we expect the RBI to cut rates by April 2015. For 2015-16, we expect inflation to average at 5.8% supported by lower oil prices, normal monsoons, proactive steps by the government and better monetary and fiscal coordination.

 

Industrial growth climbed up to 3.8% in November, as manufacturing activity saw a mild pick-up. However, despite a sharp jump in the November reading (compared to 4.2% decline in October), weakness in industrial activity appears to have continued in Q3 as well. In 2014-15, we expect industry (including construction) to growth by 3.6% compared to 0.4% last fiscal. In 2015-16 however, industry is estimated to grow 5.5% led by; (i) an improvement in private consumption demand as it benefits from an increase in discretionary spending, as food and fuel inflation decline, (ii) faster implementation of infrastructure projects as the investment climate improves, and (iii) a pick-up in mining activity.