WPI Inflation inched up to 3.2%

Indian Economic Update

The Goods and Services Tax (GST) Council on Saturday raised the cess on mid-sized to large cars and SUVs in the range of 2-7 percentage points, but kept the tax burden lower than pre-GST levels. WPI inflation inched up to 3.2% YoY in August from 1.9% YoY in July.


Headline IIP growth improved in July, helped by a favourable base.

Non-durables slow for second consecutive month
Headline IIP increased by 1.2% YoY in July, arresting the contraction seen in the previous month. The improvement in industrial numbers was broad-based, encompassing almost all components. Nonetheless, the print was muted as compared to the 4.5% YoY growth seen in July 2016.

  • On a sectoral basis, both mining (to 4.8% from 0.4%) and electricity (to 6.5% from 2.1%) sectors saw a sharp improvement in July as compared to June, adding 1.15 ppt to the headline growth, with both components aided by a substantial base effect. Manufacturing growth rose modestly to 0.1% YoY from -0.5% YoY in the same period.
  • On the use-based classification, all components except intermediate goods and consumer non-durables saw a growth uptick in July. The latter, a proxy of rural consumption demand, has fallen to a 7-month low 3.4% YoY, indicating straitened rural consumption demand.
  • Consumer durables continued to show a contraction in July (-1.3% YoY), which was the first month of higher tax levies on durables under the GST regime.
  • Sharp negative contributions to headline IIP growth came from categories such as tobacco products and diesel.

A fairly good monsoon should support rural demand on the margin, even as the demand recovery may not be as sharp as expected earlier. Additionally, the pent up demand on account of GST implementation issues should aid production in conjunction with the onset of the festive season.


CPI inflation rises on the back of sharply higher core inflation. Pause expected at RBI policy in October.

Inflation picks up amid sharp rise in core inflation
India’s consumer price inflation picked up to 3.36% YoY primarily on the back of a sharp increase in core inflation. There was almost a ~50 bps increase in core inflation for August as compared to the previous month

Key takeaways are as follows:

  • Most core components showed higher sequential momentum. It seems multiple factors contributed to this increase.
  • GST implementation related price spill overs have possibly been seen in the elevated momentum of components such as clothing and footwear and in personal care and effects within the miscellaneous component.
  • The sharply higher housing CPI is indicative of pass through from the 7th Pay Commission related HRA pay-outs. It is possible that both Centre and state impact could be there in the print.
  • Food inflation was also broadly higher with food and beverages printing 1.96% YoY but momentum in vegetables has reduced significantly to ~5.9% MoM from ~20% MoM earlier.
  • Given this print, we would have to monitor GST related price spill overs carefully going ahead to ascertain the trajectory of CPI over the months.

We had reiterated earlier that after the recent rate cut by the RBI any further action will be strictly data dependent and would require significant undershoot of the CPI trajectory. This scenario at the moment does not look likely to play out in the near term and hence we maintain a pause view in the October policy meeting.
However, we maintain that with the current negative output gap in the economy, upward pressures on core inflation should be limited once one off impact from GST peters out. The momentum in health, recreation and education has already started softening in the August print.


Global Update

The United Nations Security Council unanimously imposed sanctions on North Korea over the country’s sixth nuclear test on September 3. The sanctions now extend to a ban on the country’s textile exports and capping crude oil imports.
In its first official response to new United Nations sanctions, North Korea said that it will accelerate its plans to acquire a nuclear weapon that can strike the US homeland.
North Korea launched a missile over Japan on September 15, 2017. Japanese foreign minister said that the missile might be an ICBM. US secretary of state, Mr. Rex Tillerson has called on China and Russia to take “direct actions of their own” against North Korea following Pyongyang’s missile test.


UK: BoE maintains status-quo and says withdrawal of stimulus likely

  • Bank of England kept monetary policy unchanged with key policy rate at 0.25%, with 2 members voting for a 25 bps of rate hike.
  • Asset Purchase Facility (APF) kept unchanged at GBP 435 bn, voted 9-0.
  • Recent data paints a slightly stronger picture of the economy.
  • Withdrawal of stimulus is likely to be appropriate over the coming months.



Indian equities started the week higher. A surge in shares of a bank and broad-based buying across sectors due to dilution of the risk-averse sentiment helped the Nifty reclaim the 10,000-point mark again. Receding global concerns along with broad-based buying, especially in several blue-chip stocks, pushed the domestic benchmark indices up to close at one-month highs. Global equities got a boost as risk appetite recovered.
Reports of central government asking the Oil Marketing Companies (OMC) to absorb the recent rise in oil price weighed on OMC stocks. Meanwhile, weak economic data from China weighed on metal sectors. However, domestic buyers continue to provide support to the market.


During the week Sensex gained 1.85% to close at 32272.61 while Nifty advanced 1.49% to close at 10085.40.



Government bonds started this week marginally lower. Gilts remained in a narrow range as appetite for bonds turns weak ahead of release of August CPI Inflation and INR 227.25 bn state loan auction. Market sentiment also turned cautious ahead of INR 100 bn OMO sale.

Meanwhile, bond prices fell during mid-week following steep increase in inflation, diminishing hopes of future rate cuts by the RBI. However, value buying by some investors curtailed the decline in prices. The overall mood remains subdued after the sharp rebound in prices witnessed in August CPI print.


The 10Y benchmark yield ended at 6.61% as against previous week’s close of 6.54%.



Oil started the week mixed, as Brent slipped while WTI edged up. Brent was bearish after opening the week on a positive note, indicating that markets are not buying the talk of an output cut deal among the OPEC counterparts. The WTI benchmark held on to the gains seen this morning as Hurricane Irma abated, signaling lesser damage than anticipated.
International Energy Agency (IEA) said that the global oil surplus was starting to shrink due to robust global demand and production cuts from OPEC and other producers. OPEC’s monthly report which showed that the cartel’s production declined in August, was received positively by markets.



Gold started the week lower. The absence of any triggers from North Korea kept the safe haven asset trading in a narrow range. The yellow metal dropped after dollar rebounded from its lowest level last seen in January 2015.
Meanwhile, Gold plunged even as a steadier dollar eased some heat from the yellow metal. As uncertainties faded on a weaker than expected Hurricane Irma and subdued geopolitical tensions, the markets saw investors fleeing from the traditional safe haven assets into equities. However, the weakness in the dollar and political tensions helped the yellow metal. US President, Mr. Donald Trump urged tougher measures against North Korea.



The rupee started this week weaker, as the dollar index regained strength amid a risk-on in markets after North Korea refrained from another missile launch. However, dollar sales by some private banks and foreign banks supported the currency, as did positive local share indices. Despite these factors, importers' dollar demand weighed on the domestic currency. Dollar purchases by a large PSU bank weighed on the domestic currency. However, marginal weakness in the dollar index provided tailwinds for the domestic currency.


Source: ICICI Bank Research, Bloomberg and CRISIL.