PRESSURE MOUNTS ON RBI TO CUT RATES

By Ruma Dubey

The markets might want to celebrate tomorrow after the worry it went through yesterday.

IIP for April came in much higher than expected and CPI was much lower than all estimates. Win-win on both sides. But wait, not yet time to get the band-baaja and baaraat out on the roads.

IIP for April came in at 3.1% v/s 2.7% in March but YoY, it is a big fall from 6.5%. And CPI for May came in at 2.18% v/s 2.99% and this is a 5.5 years low!  So IIP we are very happy because we as such set very low expectations and inflation we are jubilant because the case for a rate cut just got stronger.

Food inflation for May was at -1.05% v/s 0.61%  (MoM) in April. A quick look at the internals of food inflation (MoM) will leave you baffled and indeed, this summer, if we look back at vegetable prices of past summers, we have been paying much less.

• Vegetables at -13.44% v/s -8.59%
• Pulses at 19.45% v/s 12.42%
• Fruits 1.4% v/s 3.78%
• Oil & fats at 2.7% v/s
• Cereals & Products at 4.81% v/s 5.06%
• Clothing and footwear 4.41% v/s 4.58%
• Milk & products at 4.56 v/s 4.74%
• Sugar & confectioneries at 9.84% v/s 11.37%

This is great news but that yet does not mean that RBI will suddenly announce a rate cut based on this. We are yet to see the 7th Pay Commission coming into effect and let’s be realistic, food inflation will not sustain in the negative trajectory for too long. One month is too short a time to get the true, sustainable picture on inflation.

So what this means is that all your meals, right from breakfast to dinner, are costing you much lower than what they did last year and even last month; this is good news for you but bad news for food retailers as deflationary conditions pinch sales and create added competitive threats. That is also the reason why we feel this negative food inflation trajectory will not sustain for too long.

Now to IIP. It came at 3.1% for April compared to all estimates which were in the range of 2.3% to 2.5% on the upper side. This beats it all.

In terms of industries, fourteen out of the twenty three industry groups in the manufacturing sector have shown positive growth during the month of April 2017 as compared to the corresponding month of the previous year. The industry group ‘Manufacture of pharmaceuticals, medicinal chemical and botanical products’ has shown the highest positive growth of 29.1 percent followed by 17.9 percent in ‘Manufacture of tobacco products’ and 9.5 percent in ‘Manufacture of machinery and equipment n.e.c.’. On the other hand, the industry group ‘Manufacture of beverages’ has shown the highest negative growth of (-) 19.2 percent followed by (-) 15.6 percent in ‘Manufacture of motor vehicles, trailers and semi-trailers’ and (-) 14.4 percent in ‘Manufacture of electrical equipment’.

Some important items showing high positive growth during April on a YoY include ‘Digestive enzymes and antacids (incl. PPI drugs)’ (113.4%), ‘Printing machinery’ (57.2%), ‘Meters (electric and non-electric)’ (45.1%), ‘Bidi’ (38.7%), ‘Tea’ (33.8%), ‘HR plates of mild steel’ (26.6%), ‘Industrial Valves of different types- safety, relief and control valves(non-electronic, non-electrical)’ (25.2%), ‘HR coils and sheets  of mild steel’ (24.6%) and ‘Steel frameworks or skeletons for construction of towers including pit props’ (21.3%).

And those registering negative growth are ‘Shelled cashew kernel, whether or not processed/ roasted/ salted’ [(-) 72.9%], ‘Axle’ [(-) 60.3%], ‘API & formulations of hypo-lipidemic agents incl. anti-hyper-triglyceridemics; anti-hypertensive’ [(-) 44.8%], ‘Rice (excluding basmati)’ [(-) 39.9%], ‘Plastic jars, bottles and containers’ [(-) 39.7%],  ‘Air filters’ [(-) 31.9%], ‘Tooth Paste’ [(-) 31.8%],  ‘Air/ gas compressors of all types (incl. compressors for refrigerators)’ [(-) 31.6%], ‘Stainless steel utensils’ [(-) 29.6%], ‘Commercial Vehicles’ [(-) 28.8%], ‘Aerated drinks/ soft drinks (incl. soft drink concentrates)’ [(-) 26.5%], ‘Beer & other undistilled and fermented alcoholic liqueurs other than wines’ [(-) 26.1%] and ‘Vaccine for veterinary medicine’ [(-) 24.2%].

The markets are sure to react very positively to this macro data but soon the pall of Janet Yellen will overshadow the halo. A rate hike by the FDA seems to be a foregone conclusion and we will twiddle our thumbs till midnight of Wednesday to get this data too out of the way.

For now, let us celebrate this good piece of news and look forward to a good monsoon and bountiful harvest. If the farmer reaps, we all can sleep with a full stomach!