TREASURY RESEARCH 12 August 2021

Data release: Inflation lower, Sequential recovery in IIP

CPI headline inflation eased to 5.6% in July-21 from 6.3% in the previous month (HDFC expectations: 5.7%)
The moderation in inflation was led by softening food prices in the month and a strong base from last year. Core
CPI (CPI excluding food and fuel) also inched down to 6.0% y-o-y in Jul-21 from 6.3% in Jun-21 on account of a
moderation in education and personal care and effects. However, categories like health and recreation and
amusement continued to remain elevated. Moreover, on a sequential basis, core inflation jumped up in July 21.
This along with the fact that inflation expectations are on the rise warrant some caution on the inflation trajectory
ahead and raises concerns of whether inflationary pressures are transitory.

IIP: Industrial production slowed to 13.6% y-o-y in Jun-21 from a downwardly revised 28.6% in May-21, as the
support from a favorable base waned. However, on a sequential basis IIP growth rose by 7.6% in June-21 from a
contraction of 11.5% m-o-m in May-21. Output expanded sequentially (SA basis) in 17 industries in June as
compared to a decline in all 23 industries in May.

Bond view: The better than expected CPI inflation print in addition to RBI’s purchase of bonds worth
INR 250 bn under its government securities acquisition programme (GSAP 2.0) today are likely to bring
temporary relief to bond yields. The RBI’s intervention was spread across the yield curve including the
5-year, 6-year, 7-year and 11-year papers. The cut off for 5–year was set at 5.72%, 3 bps lower than what
the paper was trading on Wednesday. 10-year yield closed lower by 1 bps at 6.23% today. We expect 10-
year yield to open lower tomorrow and trade in the range of 6.20-6.22%. In addition, the 5-year paper is
also expected to trade lower tomorrow.

G-SAP 2.0: Purchase results

Amount notified by the RBI INR 25,000 crore

Total amount offered by the INR 102,289 crore
participants
Amount accepted by the RBI INR 25,000 crore
Source: RBI and HDFC Bank

Inflation expectations: While inflation prints eased in July, 3-month ahead and one-year ahead inflation
expectations rose further in the month, according to the household’s inflation expectation survey. 3-
month ahead (median) inflation expectations rose by 50 bps to 11.3% in Jul-21 as compared to 10.80% in
May-21 while one-year ahead (median) inflation expectations rose to 11.5% as compared to 10.9% in
May-21.

FY22 CPI inflation Outlook: Going forward, we expect inflation to remain above 5.5% for the next 1-2
months before moderating closer to 5.0% by September-October supported by a favorable base, easing
of supply bottlenecks and moderation in food prices. However, as the base effect drops off and pricing
power improves in the system along with elevated input costs, we expect CPI Inflation to climb back
above 6% from Dec-21 onwards.

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 CPI Inflation internals: Y-o-Y change
%YoY J an-21 Fe b-21 Mar-21 Apr-21 May-21 J un-21 J ul-21
CPI 4.1 5.0 5.5 4.2 6.3 6.3 5.6
Food and beverage 2.7 4.3 5.2 2.6 5.2 5.6 4.5
Egg 12.9 11.2 10.6 10.6 15.2 19.4 20.8
Edible Oils 19.8 20.9 24.9 25.9 30.9 34.8 32.5
Pulses 13.3 12.6 13.3 7.5 9.4 10.0 9.0
Cereals 0.1 -0.3 -0.7 -3.0 -1.4 -1.9 -1.7
Veget ables -15.8 -6.3 -5.0 -14.5 -1.9 -0.7 -7.7
Fue l and light 3.9 3.5 4.4 8.0 11.9 12.6 12.4

Core Inflation (CPI e x food and

fue l) 5.7 6.1 6.1 5.4 6.5 6.3 6.0
Misce llane ous 6.5 6.8 7.0 6.1 7.3 7.2 6.7
Healt h 6.1 6.3 6.2 7.7 8.4 7.7 7.7
Recreat ion and amusement 5.5 5.9 6.2 4.6 6.1 5.0 6.4
Personal Care and effect s 10.7 8.7 5.9 5.4 7.4 4.8 3.8

Source: CEIC and HDFC Bank

Key CPI data highlights:

 CPI Inflation eased on a YoY basis to 5.6% in Jul-21 however, picked up on a sequential basis to
0.7% in Jul-21.

 Food and beverage inflation eased to 4.46% in Jul-21 from 5.58% in Jun-21. Looking at the internals,
oils and fats continued to remain high, clocking a print of 32.5% in Jul-21 while egg prices rose to
20.8%. Pulses prices moderated to 9% in Jul-21 from 10% in the previous month, reflecting the
impact of a number of measures taken by government to reduce inflation in pulses (such as
reducing import quota restrictions, offloading stocks etc. over the last 2-3 months). On the
other hand, cereal prices continued their downward trajectory, contracting by -1.8% in Jul-21.

o On a sequential basis, food and beverages prices eased to 0.86% in Jul-21 lower than the
seasonal momentum of 1.75% (average of last 5 years) and as compared to 1.95% m-o-m
recorded in Jul- 20.

Monthly momentum of core CPI and fuel picked up in Jul--21

% mom Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21
CPI -0.6 0.2 0.1 0.6 1.7 0.6 0.7
Core CPI 0.6 0.5 0.2 0.5 1.3 0.2 0.9
Food and
-2.1 -0.4 -0.1 0.8 1.7 1.2 0.8
beverages
Fuel and Light 1.6 1.5 2.0 0.1 2.4 0.3 0.6

Source: CEIC and HDFC Bank

 Fuel Inflation stood at 12.4% in Jul-21 vs. 12.6% last month, reflecting higher LPG, kerosene and
electricity prices.

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 Core CPI inflation: Core CPI inflation (CPI excluding food and fuel) stood at 6.0% in Jul-21 vs. 6.3%
in Jun-21. Looking at the internals, transport and communication, recreation and amusement and
health continued to remain higher on a y-o-y basis.

 Rural-Urban divide: Rural inflation was lower than urban inflation. Rural inflation eased to 5.5% in
Jul-21 from 6.2% in Jun-21 while urban inflation eased by 60 bps to 5.8% in Jul-21. On the other hand,
Rural core inflation stood higher (6.0%) than urban core inflation (4.9%) in Jul-21.

CPI inflation eased to 5.6% in jul-21 led by moderation Fuel inflation remained above 12% in Jul-21
in food prices

Source: CEIC, HDFC Bank Source: CEIC, HDFC Bank

CPI Inflation trajectory FY22

Source: CEIC, HDFC Bank

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IIP improved sequentially with support from manufacturing sector

 IIP slowed in Jun-21 on a YoY basis: Growth in Industrial Production slowed to 13.6% in June-21
from 28.6% in May-21, as the support from a lower base began to fall-off. Industry wise, while YoY
growth in manufacturing sector eased to 13.0% (vs. 33.5% in May-21), electricity and mining
segments performed relatively better in June. Discouragingly, among segments as per use based
classification, consumer non-durables production fell in June-21.

 But sequential recovery recorded in June 21: On a MoM SA basis, manufacturing output increased
by 9.4% in June-21 (vs. -12.9% in May-21). Furthermore, in June-21, output expanded sequentially
(SA basis) in 17 industries as compared to a decline in all 23 industries in May-21.

Consumer non-durables production expanded by 9.9% in June vs. a decline of 9.3% in May-21. On
the similar lines, consumer durables segment recorded a solid growth of 37.6% vis-à-vis a contraction
of 32.2%, previously.

 Recovery Check: Our weekly activity index suggests that the aggregate activity has surpassed pre-
second wave levels recently. However, recovery is still uneven as signals from high frequency data
remain mixed. For instance, while manufacturing PMI and power generation improved in July, non-
oil non-gold imports and rail freight declined sequentially. Another cause of concern is lingering
stress in the rural sector. With uneven monsoon, Kharif sowing has remained weak which could
delay a revival of the rural economy.

Moving ahead, we expect Government Capex and Exports to be the main growth drivers in FY2022.
We estimate GDP to turn positive on a QoQ basis in Q2 and average at 9.1% for the full year. That
said, our growth outlook is contingent on the fact that the pandemic situation does not deteriorate
further and vaccination drive gathers pace.

Broad based improvement in the industrial production (on SA mom basis)

MoM, SA% Feb-21 Mar-21 Apr-21 May-21 Jun-21

IIP 0.8% 3.3% -0.1% -11.5% 7.6%
Industry Wise
Mining 2.3% 3.0% -1.5% -0.5% 1.2%
Manufacturing 0.6% 3.5% 0.3% -12.9% 9.4%
Electricity 2.7% 5.2% -4.2% -11.1% 6.3%
Good Wise
Primary Goods 1.0% 2.1% -0.1% -6.7% 3.7%
Capital goods -0.1% 8.3% -2.9% -23.3% 17.5%
Intermediate goods -0.7% 1.8% 3.7% -8.4% 2.0%
Infra goods -0.7% 5.9% 0.8% -10.8% 5.3%
Consumer durables 4.2% 3.7% -7.5% -32.2% 37.6%
Consumer non durables 2.5% 3.0% 1.5% -9.3% 9.9%
Source: CEIC, HDFC Bank

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Economic activity surpassed pre-second wave levels, as However, recovery is yet to be broad based
per our weekly activity index

Monthly High Frequency Indicators

Apr-21 May-21 Jun-21 Jul-21
PMI-Manufacturing 55.5 50.8 48.1 55.3
PMI-Services 54 46.4 41.2 45.4
GST Collections (in INR, Bn) 1413.8 1027.1 928.5 1163.9
E-Way Bills (in Mn) 58.8 40.0 54.7 64.2
SA, MoM%
Rail Freight 1.9% 0.0% -1.3% -1.5%
Power Generation -4.1% -12.8% 4.9% 9.7%
Steel Production -0.7% -1.9% 0.7% 1.1%
Tractor Sales -14.5% -21.6% 45.3% -9.1%

Exports 5.4% -1.1% 7.1% 3.6%

Imports 4.5% -15.8% 13.9% 6.6%
NONG-Imports 6.2% -5.6% 5.3% -9.2%
Source: CEIC, HDFC Bank. Note: Our weekly activity index is an equal Source: CEIC, HDFC Bank
weighted average of z values of seven variables. (Rail Freight, UPI
payments, Traffic Congestion, Google Mobility, Unemployment,
Power Generation and E-Way Bills)

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Treasury Economics Research Team

Abheek Barua, Sakshi Gupta,

Chief Economist Senior Economist
Phone number: +91 (0) 124-4664305 Phone number: +91 (0) 124-4664338
Email ID: [email protected] Email ID: [email protected]

Swati Arora, Avni Jain,

Economist Economist
Phone number: +91 (0) 124-4664354 Phone Number: +91 (0) 124-4664354
Email ID: [email protected] Email ID: [email protected]

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