Tamanna Inamdar: Your take on the latest headline numbers?
Aditi Nayar: The CPI and IIP data did offer a bit of a positive surprise. The IIP eased sequentially and the YoY growth flattened but not as much as we thought it would. The impact of the state-wise restrictions in industrial activity was not as bad as what the GST e-way bills had suggested.
So the IIP number has not fallen as much as we thought it would, but on the other hand the CPI inflation, which we expected to come in at 6.1%, was well below the consensus expectation. It was flattish at 6.3% in June. But at least it is a relief that it has not hardened even further above the surprising trend that we got last month.
As for the IIP numbers, the low base effect is there but we are definitely seeing some impact of the second wave?
On the IIP side, YoY numbers are meaningless. If we compare the IIP index levels in May 2021 with pre-Covid May 2019 levels, all of them are actually lower — whether we look at the headline IIP, or the three sectors, or use-based categories.
It is telling us that obviously the demand and supply both have taken a hit during the second surge with the widening of state-level restrictions. That is something that we need to watch out for in terms of a recovery which is incomplete right now.
How do you think is the MPC going to respond to this?
In terms of what we have seen in the last two months, the number has remained above the 6% upper threshold of the MPC. That is something that we think will inject a tone of uneasiness as far as the next policy review is concerned.
However, we do think that the numbers have peaked out, and that we are going to get lower numbers going forward. The average inflation expectations for FY22 is now somewhere in the range of 5.5% to 5.7%, which is a little bit on a higher side. That is more a floor as far as any expectations are concerned.
Going ahead, I do think that the latest number has at least put aside concerns about a premature lift-off in terms of policy normalisation. After seeing these numbers, I do think that the maximum we could expect is that the stance could go from accommodative to neutral in the December policy, not earlier than that.
But really, we do not expect too much of rate normalisation to happen in Q3 now. So we are back to our earlier expectation — the base line expectation being that we will move towards a neutral stance and some increase in rates in Q4.