India’s inflation and production numbers remain subdued

Further rate cuts are to be expected.

Yesterday’s data, yet again, highlights the disconnect between strong revised GDP numbers and mediocre industrial momentum on the ground.

Post the rebasing exercise, Jan CPI inflation stood at 5.1% YoY, up from 4.3% in Dec under the new base year. Dec CPI inflation was 5% under the older series. Much of the rebound was on the back of higher food prices mainly vegetables and cereals, up 6.1% YoY. Imported inflation was in check due to a stable rupee and subdued crude prices. Households’ inflation expectations have also corrected to single digits for the first time in five years.

According to a report by DBS, despite the revisions, the broader inflation trend is still below the RBI’s target of 6% by January 2016 and will keep the door open for further rate cuts. We await the central bank’s take on the rebased GDP and inflation numbers, with policy guidance to remain dovish if inflation rather than growth continues to get more weightage from the central bank. More so as subdued CPI point to economic slack whilst GDP numbers suggest consumption demand is stronger than previously anticipated.

Out concurrently was Dec IP which slowed to 1.7% YoY from Nov’s 3.8%, posting a small negative on seasonally adjusted basis. Manufacturing activity rose 2.1% (vs Nov’s 3%) overcoming festive distortions, whilst mining output slipped into red and electricity generation eased as expected. On six-month moving average basis, manufacturing activity is still treading water, keeping headline IP subdued.