IIP growth at 0.1% for Jan14 was a pleasant surprise, even as CPI declined to 8.11% in Feb14 largely in consonance with street expectations (SBI at 7.95%).
1. The growth in IIP reflects a clear dichotomy between export-led growth and domestic slowdown. For example, at 2 digit level, positive outlier sectors are textiles, apparels and chemicals and finished leather products, carry combined weightages of 19% in IIP index, appear to have benefited from rupee depreciation as these are export oriented.
2. On the downside, sectors like food product & beverages, communications and motor vehicles with a combined weightage at 12.3% are witnessing a significant slowdown.
3. Going by CSO projections, manufacturing sector needs to log in a growth rate at 1.1% in Feb-Mar14, which looks difficult, given that export growth are now slowing down.
4. While CPI inflation at 8.1% was in line with market expectations, the point of worry is that given the news of unseasonal rains and crop damage, prospect of a not-so normal monsoon may limit the downward trajectory in food prices.
5. If we were to replicate core CPI numbers at 7.66% on the Feb14 numbers (the lowest level historically) and the gap between core CPI and headline CPI, the headline CPI numbers should be close to 7.8%-7.9%.
8. This implies that a downward trend in CPI is capped at 7.8% going by current trends, and this will continue to be heartburn for RBI.
Dr Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India