Inflation relief, Industrial growth weak

Inflation in April fell to 4.9 per cent from 5.3 per cent last month, amidst worries that unseasonal rains would lead to a spurt in food prices; food inflation surprisingly fell to 5.1 per cent from 6.1 prices.

This suggests that the impact of weather-related disturbances is yet to be felt on crop production, says Crisil Research.

But the slide is also because of a high base from last year – inflation in April 2014 had reached 8.5 per cent after which it steadily came down. During April, core inflation remained stuck around 4.6 per cent, while fuel inflation rose by 44 basis points (bps) possibly due to a weaker rupee and higher oil prices.

Recently, there has been a reversal in some of the 'good luck factors' that helped bring down inflation last year.

On the back of unseasonal rains damaging the rabi crop, the IMD has predicted 7 per cent deficient rainfall in 2015, global crude oil prices have started rising and are already 9.1 per cent higher than March levels (See: Global petrochemical prices up 10% in April from March) and the rupee too is weaker by nearly 4.5 per cent y-o-y.

But, we still believe, that inflation will head lower this fiscal and expect the RBI to lower the repo rate by about 25 to 50 bps in the first half of the fiscal.

The significant dip in April inflation should further tame inflation expectations giving the RBI headroom for another out-of-cycle rate cut before the next policy review on 2June.

Industrial production grew 2.8 per cent in FY15 as compared to -0.1 per cent in FY14.

However, the sluggish pace of domestic demand and weak export demand have weighed on industrial production. Even so, recent months' data suggests that both consumer and investment related sectors are grinding up, albeit only gradually. Therefore strengthening the case for a rate cut in June by the RBI.

For FY16, Crisil Research expects IIP growth to pick up steadily led by:

• Improvement in private consumption demand as it benefits from an increase in discretionary spending, as food and fuel inflation decline,
• Faster implementation of stalled infrastructure projects as the investment climate improves,
• A pick-up in mining activity.

In addition, a weakening rupee and the recovery in US and EU might provide support for export-oriented manufacturing sectors in the first half of this fiscal.

Crisil said in a statement, "Some green shoots to watch out for in the coming months are the consumer related and export oriented sectors (such as textiles). On the flip side, a weak monsoon is a mounting risk for consumer oriented sectors and therefore for overall industrial growth."