Economic Spotlight

Inflation Falls To A Record Low

CPI inflation went down sharply to 2.3% Y-o-Y in Nov-18 from 3.3% Y-o-Y in Oct-18, again giving a Sahil Kapoor
downward surprise. Headline inflation is still being dragged down by falling food & beverage prices, Chief Market Strategist
which fell by 1.7% Y-o-Y against a fall of 0.1% Y-o-Y in Oct-18. Inflation was also pulled down by a fall sahil.kapoor@edelweissfin.com
in international crude oil prices seen in the last two months which led to moderation in fuel & light +91 (22) 4088 6044
inflation to 7.4% Y-o-Y from 8.6% Y-o-Y, although there was a favourable base effect also at play.
Falling crude prices also had their second order effects leading to slowing transport & Shobana Krishnan
Economist
communication inflation at 6.1% Y-o-Y. The HRA impact continues to wane leading to housing
shobana.krishnan@edelweissfin.com
inflation falling to 6% Y-o-Y from 6.6% Y-o-Y in Oct-18 also aided by a higher base. All components +91 (22) 4272 2636
of inflation largely saw a deceleration. Core CPI (ex. Food & Fuel) grew by 5.8% Y-o-Y in Nov-18
against 6.2% Y-o-Y in Oct-18. The significantly low headline inflation comes as RBI, in its latest Ashutosh Gehlot
monetary policy review, revised the H2 FY19 inflation forecast downward by nearly 100bps, as Market Strategist
they kept the benchmark policy repo rate unchanged. However, the MPC noted quite a few upside ashutosh.gehlot@edelweissfin.com
risks to their forecast pointing to the need for close monitoring of food and oil prices. Fiscal +91 (22) 6187 9533
slippages at the centre, as elections approach, is another upside risk for inflation going ahead.
However, Slowdown in core inflation may ease some of these upside risks.

Food Inflation Continues To Be Major Dragger

Food constitutes around 40% of the CPI inflation basket and therefore, a fall in food prices is a major
dragger on the headline inflation number. Prices of vegetables, pulses, sugar and eggs fell
significantly in Nov-18 by 15.6%, 9.2%, 9% and 3.9% Y-o-Y respectively. The large decline in vegetable
and eggs prices was partly aided by a high base. Pulses prices have been continuously declining for
the past 24 months. Cereals inflation slowed down to a cyclically low level of 1.3% Y-o-Y in November
which is the lowest rate since mid-2015. This came despite the implementation of higher MSP prices
through the MAS scheme. However, food inflation could see a major upward surprise going ahead
as the impact of MSP price hikes still remains uncertain and there is a possibility of sudden reversal
in prices of volatile perishable food items such as fruits.

Falling Crude Prices Start To Play Out But Other Risks Sustain
International crude oil prices have been a downward trend for the last two months with Brent Crude
prices reaching close to USD 61/barrel. An apparent supply glut in the international crude market
and expectations of falling demand are pushing the prices lower. The falling crude prices have
started to show up in inflation numbers as fuel & Light inflation and transport inflation slowed.
However, with OPEC+ attempting to balance the oil market by cutting supply, higher crude oil prices
may make a comeback going ahead.
There is an increased risk of fiscal slippages at the centre as the general elections approach in 2019.
The issue could be intensified in light of the major loss sustained by the ruling government in the
recent state elections, which could prompt them to undertake more populist measures such as farm
loan waivers. Persistent weakness in GST collections may further increase the fiscal deficit.

Outlook
Given the continued downward trajectory in inflation, the RBI cut their H2 FY19 inflation forecast by
nearly 100bps. However, certain risks still persist including the possibility of an upward surprise in
food inflation, uncertainty regarding MSP impact, bounce back in crude prices and fiscal slippages at
the centre. We believe that RBI shall still monitor these factors and maintain status quo in policy in
the near term.

Food & Oil Continue To Drag Inflation Lower

10
8
6
Y-o-Y%

4
2
0
-2
-4
Jun-16

Dec-16

Jun-17

Dec-17

Jun-18
Oct-16

Oct-17

Oct-18
Aug-16

Feb-17

Apr-17

Aug-17

Feb-18

Apr-18

Aug-18

CPI Food and beverages

Date: 12th December, 2018
Core - CPI Ex Food and Fuel Higher Range of RBI Target
Lower Range of RBI Target

Edelweiss Professional Investor Research 1

CPI
YoY growth (%) Weights Nov-18 Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17

CPI 100 2.3 3.3 3.7 3.7 4.2 4.9 4.9 4.6 4.3 4.4 5.1 5.2 4.9

Food and beverages 45.9 -1.7 -0.1 1.0 0.8 1.7 3.1 3.3 3.0 2.8 3.4 4.6 4.9 4.4
Pan, tobacco and
2.4 6.1 6.1 5.6 5.4 6.3 8.1 8.0 7.9 7.8 7.3 7.6 7.8 7.8
intoxicants
Clothing & footwear 6.5 3.5 3.6 4.6 4.9 5.3 5.6 5.5 5.1 4.9 5.0 4.9 4.9 5.0

Housing 10.1 6.0 6.6 7.1 7.6 8.3 8.5 8.4 8.5 8.3 8.3 8.3 8.3 7.4

Fuel & light 6.8 7.4 8.6 8.6 8.6 8.0 7.2 5.8 5.2 5.7 6.8 7.7 7.9 7.9

Miscellaneous 28.3 6.2 6.7 5.7 5.6 5.8 5.7 5.4 5.0 4.2 3.9 3.8 3.8 3.6
Core - CPI Ex Food and
47.3 5.8 6.2 5.8 5.9 6.3 6.4 6.2 5.9 5.3 5.1 5.1 5.1 4.8
Fuel
Higher Range of RBI
6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0
Target

YoY growth Weights Nov-18 Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17

Food Inflation 39.06 -1.7 -0.9 0.5 0.3 1.3 2.9 3.1 2.8 3.0 4.3 4.6 4.9 4.4
-Cereals and products 9.67 1.3 2.6 2.9 3.0 2.9 2.7 2.8 2.6 2.2 2.1 2.3 2.7 3.3
-fish and meat 3.61 5.0 3.0 2.4 3.2 2.3 2.2 3.5 3.6 3.2 3.3 4.3 4.1 3.3
-Egg 0.43 -3.9 2.2 3.8 6.8 7.4 5.9 5.8 6.3 7.5 8.5 8.7 9.3 8.0
-Milk and products 6.61 0.8 0.9 2.4 2.6 2.9 3.0 3.2 3.2 3.5 3.8 4.2 4.4 4.5
-Oils and fats 3.56 1.6 2.2 3.1 3.5 2.8 2.6 2.5 2.1 1.9 1.1 1.3 1.6 1.1
-Fruits 2.89 0.2 0.4 1.7 3.5 6.9 10.1 12.1 9.7 5.8 4.8 6.2 6.6 6.2
-Vegetables 6.04 -15.6 -8.1 -4.2 -7.1 -2.3 7.8 8.0 7.3 11.7 17.6 27.0 29.1 22.5
-Pulses and products 2.38 -9.2 -10.3 -8.7 -7.8 -8.9 -10.9 -11.6 -12.4 -13.4 -17.4 -20.2 -23.5 -23.5
-Sugar and condiments 1.36 -9.0 -7.6 -6.4 -5.4 -5.8 -7.1 -8.2 -4.1 -1.6 -0.3 2.9 6.2 7.8
-Spices 2.5 3.1 2.8 2.9 2.8 2.7 2.3 1.5 1.3 -0.1 -1.0 -1.4 -2.2 -2.1

YoY growth Weights Nov-18 Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17
Total Miscellaneous
28.32
Inflation 6.2 6.7 5.7 5.6 5.8 5.7 5.4 5.0 4.2 3.9 3.8 3.8 3.6
-Household goods and
3.8
services 5.8 6.1 4.8 5.0 5.1 5.1 5.0 4.8 4.3 4.2 4.3 4.3 4.5
-Health 5.89 7.2 7.9 6.0 5.8 5.9 6.0 5.9 5.5 5.2 5.0 4.9 4.9 4.6
-Transport and
8.59
communication 6.1 7.7 6.5 6.0 6.6 6.2 5.3 4.6 2.9 2.4 2.0 2.2 2.1
-Recreation and
1.68
amusement 5.9 4.9 5.2 5.0 5.1 5.3 4.9 5.0 4.4 4.3 4.4 3.9 4.0
-Education, stationery
4.46
etc. 6.6 6.2 6.4 6.1 5.8 5.5 5.4 5.1 4.6 4.1 4.3 4.1 4.4
-Personal care and
3.89
effects 4.1 5.2 4.1 4.5 5.3 5.4 5.6 5.0 4.6 4.2 4.6 4.5 3.3

Edelweiss Professional Investor Research 2

IIP Accelerates On The Back Of Base Effect
The Index of Industrial Production sped up significantly and grew by 8.1% Y-o-Y in Oct-18 up from 4.5% Y-o-Y in Sept-18. The
growth was backed by a favourable base effect. Mining & Quarrying production accelerated to 7% Y-o-Y from 0.2% Y-o-Y in
Sept. Manufacturing sped up to 7.9% Y-o-Y up from 4.6% Y-o-Y in Sept. Electricity continued to be the major growth driver of
the index with a growth of 10.8% Y-o-Y up from an impressive 8.2% Y-o-Y in Sept. All three components were significantly aided
by a low base.
Economic activity basis
21 out of 23 industry groups in the manufacturing sector have shown Y-o-Y positive growth in October. Growth was led by labour
intensive manufacturing sectors. Wood & Wood Products, Leather & related products and Furniture showed the highest growth
in the segment with growth rates of 39%, 11.6% and 41% Y-o-Y respectively. Going ahead, the 12 point plan of the government
and possible support by the RBI may aid MSMEs and drive further growth. Other major positive drivers were computers,
machinery and other transport equipment production. Slowdown in growth in basic metals as well as paper & paper products
were the major draggers.
Mining & Quarrying production, although accelerating on the back of base effects, continues to be a concern as crude oil and
natural gas production continue to decline, as indicated by the eight core industries index. Electricity generation has been a major
driver of the index in the last few months and continues to be so as the growth remains high at 10.8% Y-o-Y.
Usage basis
All sectors showed an acceleration except for infrastructure and construction goods. However, the growth in
infrastructure/Construction goods is still healthy considering the significantly high base for the segment. On the consumption
front, both durables and non-durables saw an acceleration growing by 17.6% and 7.9% Y-o-Y respectively, aided in part by a lower
base. Growth in consumption goods production may also have been aided by the impact of a delayed festive season.
Our take
Risks to production outlook still persist. An apparent slowdown in domestic as well as international demand may hamper growth
going ahead. Slowdown in international trade flows amidst the US-China trade war is a major factor affecting export demand.
Tightening credit conditions in the economy would negatively affect domestic demand. However, decline in international crude
oil prices and a stable rupee may aid production. Growth in IIP may slowdown going ahead given a higher base.

IIP Growth Rises On The Back Of A Low Base

12.0
10.0 8.5 8.1
7.3 7.5
8.0 6.9 6.9 6.5
4.8 5.3
Y-o-Y%

6.0 4.8 4.7 4.5

4.2 3.9
4.0 3.2 2.9
1.8
2.0 1.0

0.0
Jun-17

Nov-17

Dec-17

Jun-18
Jul-17

Oct-17
Aug-17

Jul-18

Oct-18
Apr-17

Sep-17

Feb-18

Apr-18

Sep-18
May-17

May-18

Aug-18
Jan-18

Mar-18

-2.0 -0.3

IIP Mining & quarrying Manufacturing Electricity

Labour Intensive Sectors Emerge Strong

15
10
Y-o-Y% 3MMA

5
0
-5
-10
Jul-15

Jul-16

Jul-17

Jul-18
Oct-15

Oct-16

Oct-17

Oct-18
Apr-15

Apr-16

Apr-17

Apr-18
Jan-15

Jan-16

Jan-17

Jan-18

Source: MOSPI, Edelweiss Professional Investor Research

Edelweiss Professional Investor Research 3

IIP Component wise
IIP by Economic Activity
Weights Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17
(YoY, % Chg)
IIP 100.0 8.1 4.5 4.7 6.5 6.9 3.9 4.8 5.3 7.1 7.5 7.1 8.4 2.2
Mining & quarrying 14.4 7.0 0.2 -0.5 3.4 6.6 5.8 4.1 3.1 -0.3 0.1 1.2 1.1 0.2
Manufacturing 77.6 7.9 4.6 5.1 7.0 6.7 3.7 5.3 5.7 8.7 8.8 8.4 10.2 2.5
Electricity 8.0 10.8 8.2 7.6 6.7 8.5 4.2 2.1 6.0 4.5 0.1 4.4 3.9 3.2

IIP by Usage (YoY, % Chg) Weights Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17

IIP 100.0 8.1 4.5 4.7 6.5 6.9 3.9 4.8 5.3 6.9 7.5 7.1 8.4 2.2
Primary goods 34.1 6.0 2.6 2.5 6.7 9.3 5.7 2.8 3.0 3.7 5.8 3.7 3.2 2.5
Capital goods 8.2 16.8 5.8 9.3 2.8 9.8 6.9 11.9 -3.1 16.6 14.6 16.4 9.4 6.8
Intermediate goods 17.2 1.8 1.4 2.8 1.0 1.5 0.8 1.7 2.5 3.4 4.9 6.2 5.5 0.2
Infrastructure/construction
12.3 8.7 9.5 8.0 9.2 8.2 7.4 7.0 9.1 13.0 6.8 6.7 13.5 5.2
goods
Consumer goods 28.2 5.8 5.9 9.3 5.8 1.6 6.3 10.6 7.4 0.9 0.8
IIP Manufacturing
Weights Oct-18 Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17
(YoY, % Chg)
Manufacturing Total 77.6 7.9 4.6 5.1 7.0 6.7 3.7 5.3 5.7 8.4 8.7 8.4 10.2 2.5
Food products 5.3 17.4 17.0 9.4 2.5 6.2 10.7 18.8 26.4 24.3 12.5 11.4 3.1 0.4
Beverages 1.0 -1.7 5.1 7.3 12.6 10.5 7.7 3.9 3.2 12.3 12.0 6.6 -5.2 3.0
Tobacco products 0.8 1.1 -7.3 -17.0 28.1 -31.7 -15.2 3.8 -20.6 -2.0 -46.5 -28.2 -11.9 -20.9
textiles 3.3 6.2 5.4 7.8 2.9 -0.8 0.4 -0.8 -1.2 2.2 2.7 5.4 -1.9 -2.0
Wearing apparel 1.3 28.0 20.9 18.9 9.5 4.4 -5.2 -13.3 -0.5 -8.4 -10.7 -13.5 -9.8 -11.0
Leather and related
0.5 11.6 2.7 6.7 9.6 2.0 -2.4 -1.8 -3.0 0.1 7.7 16.4 -0.2 -1.1
products
Wood and products of
0.2 39.0 20.6 12.7 5.8 9.6 2.2 4.4 -3.0 2.2 1.7 1.1 -0.7 -2.3
wood (ex Furniture)
Paper and paper products 0.9 -1.8 -0.5 -5.1 -2.6 3.3 -5.1 -2.7 -2.0 -3.6 -3.3 -2.9 -5.3 -4.0
Printing and reproduction
0.7 5.8 -12.9 -19.2 -2.6 1.0 -2.9 -11.2 2.3 -9.3 -13.2 -10.8 -3.1 -6.7
of recorded media
Coke and refined
11.8 1.6 0.3 2.6 10.7 11.9 4.9 1.2 -0.7 6.8 11.5 5.6 2.7 4.0
petroleum products
Chemicals and chemical
7.9 0.8 1.3 7.7 4.1 5.7 5.5 3.9 1.8 -2.9 3.6 5.5 -1.7 -0.1
products
Pharmaceuticals,
medicinal chemical and 5.0 6.1 5.7 7.9 6.6 -0.5 -7.5 7.8 20.1 4.9 22.3 33.6 25.1 23.0
botanical products
Rubber and plastics
2.4 5.7 4.4 -1.5 -0.4 2.7 -7.9 -10.1 -11.8 -8.6 -2.4 -7.1 -8.3 -16.1
products
Other non-metallic mineral
4.1 14.0 11.3 9.2 5.5 10.9 9.5 10.9 9.2 15.2 15.5 14.4 -1.3 -3.4
products
Basic metals 12.8 2.8 4.2 3.1 4.0 4.3 4.0 3.3 9.9 10.8 4.0 4.9 4.7 6.1
Fabricated metal
products, except 2.7 3.3 1.2 -2.2 10.1 11.9 12.7 9.8 11.0 17.1 6.6 5.1 -1.5 4.5
machinery and equipment
Computer, electronic and
1.6 30.2 -1.0 -7.3 27.7 44.1 31.2 28.1 15.1 16.5 22.1 29.8 14.8 9.7
optical products
Electrical equipment 3.0 1.9 -3.2 1.5 7.7 15.1 2.0 3.8 -6.8 -2.7 -2.0 -14.9 -15.1 -15.4
Machinery and equipment
4.8 21.9 5.8 3.0 -1.2 7.8 -0.3 8.6 -7.9 23.3 14.9 10.1 4.4 2.1
n.e.c.
Motor vehicles, trailers
4.9 16.1 9.5 12.0 14.8 20.5 22.5 22.3 18.2 20.0 26.6 25.9 8.1 12.8
and semi-trailers
Other transport
1.8 24.8 11.4 9.0 18.9 15.6 8.1 13.2 16.3 32.0 33.1 38.3 9.5 0.8
equipment
Furniture 0.1 41.0 32.8 29.2 42.7 10.7 11.3 9.7 40.0 20.1 27.8 22.8 -0.6 -6.7
Other manufacturing 0.9 23.0 -10.7 -6.9 3.7 -40.2 -32.2 -32.8 -32.4 -32.4 -32.4 -22.3 -6.5 -36.5
IIP Consumer Goods (YoY,
Weights Sep-18 Aug-18 Jul-18 Jun-18 May-18 Apr-18 Mar-18 Feb-18 Jan-18 Dec-17 Nov-17 Oct-17 Sep-17
% Chg)
Consumer goods 28.2 5.8 5.9 9.3 5.8 1.6 6.3 10.6 7.4 9.4 17.4 26.6 0.8
– Consumer durables 12.8 17.6 5.2 5.3 14.3 13.4 6.4 4.5 6.2 7.5 7.6 0.9 3.2 -6.9
– Consumer non- durables 15.3 7.9 6.1 6.5 5.5 0.2 -2.1 7.9 14.1 7.4 10.7 16.5 23.4 7.7

Edelweiss Professional Investor Research 4

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Edelweiss Professional Investor Research 5

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There were no instances of non-compliance by EBL on any matter related to the capital markets, resulting in significant and material disciplinary action during the last three years.
A graph of daily closing prices of the securities is also available at www.nseindia.com

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Edelweiss Professional Investor Research 6

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