Inflation & IIP review

Inflation  

in May rose to 5.01%, up from 4.87% in April. Higher fuel-related inflation - led by an increase of Rs 7.42/litre in petrol and Rs 5.6/litre in diesel prices during the month - was behind the inflation pick-up. During May, a combination of higher global oil prices (16% higher than Mar‘15 levels) and weaker rupee (8% y-o-y) pushed up retail fuel prices. The combined fuel index (fuel & light and transport & communication) rose to 3% in May from 1.9% in April. Food inflation provided relief, falling to 5.1% from 5.4% in May. Monsoon is the biggest risk hereon, but a lot will depend on government action to keep a tab on food inflation. We retain our CPI inflation forecast at 5.8% for FY16, which is lower than 6% in FY15, in anticipation of pro-active steps from the government.

 

Industrial production

grew 4.1% in April as compared to 2.5% in March with manufacturing sub-index growth lifting up to 5.1%. Recent months’ data suggests that both consumer and investment related sectors are grinding up, albeit only gradually as indicated by the uptick in consumer and capital goods IIP sub-indices. However, the looming risk of a second consecutive weak monsoon might mean that the uptick in consumption would be slow. We expect GDP growth to rise to 7.4% in FY16 with 1.5% growth in agriculture and 6.5% growth in industry. Export-oriented sectors such as textiles in manufacturing could benefit from a weakening rupee and a mild recovery in the global economy.