India April inflation and March IIP report

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  India April inflation and March IIP report

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• The story: Retail inflation (CPI) for April 2021 softened to 4.29 per cent while the Index of Industrial Production (IIP) surged to over 22 per cent for March 2021, mainly on account of low base effect.
• IIP analysis: For the full year, industrial production (IIP) contracted 8.6 per cent in 2020-21 compared to 0.8 per cent contraction in 2019-20. Manufacturing sector output surged 25.8 per cent in March 2021 while mining output expanded 6.1 per cent and power generation grew by 22.5 per cent.

1. The factory output rose sharply on account of low-base effect. The economic activity had come to a halt in the last week of March as the country entered a lockdown to combat the coronavirus outbreak.
2. The low base related to the onset of the nationwide lockdown in March 2020 powered the IIP growth to a high 22.4% in March 2021, led by manufacturing and electricity. 
3. The pace of the IIP's expansion in March 2021 was in the middle of our forecast range (17.5-25.0%). Given the low base of the lockdown, it was more meaningful to compare the industrial performance in March 2021 with March 2019, which reveals a mild contraction of 0.5%.
4. The core sector output, which forms 40% of the Index of Industrial Production, expanded by nearly 7% in March on account of low base effect.

• Inflation analysis: Prices rose at a slower pace in April primarily on account of benign food prices. The April figures show a decline from March's 5.52% which was a four-month high but within the RBI's tolerance band of 2-6%. The RBI has projected an inflation of 5.2% for the first half of the current fiscal.
• Base effect: As the lockdown base fades away, the CPI inflation may bounce back to an average of 5.0% in the remainder of H1 FY2022, ruling out the possibility of further rate cuts to support economic activity and sentiment. Since even now, the economic outlook is uncertain in light of the continuing pandemic, the monetary policy stance will remain accommodative for much of 2021. Hardening of commodity prices could add to the input costs and poses a risk at a time when a benign rate scenario would be needed to aid growth.
• Monetary policy: India has extended the 2016-21 Flexible Inflation Targeting (FIT) regime to the next 5 years, i.e. 2021-26. The RBI tries to maintain CPI-based inflation in the range of 4% plus/minus 2%. 

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