Be ready for pause in rate cuts, higher inflation

The good news is that the increase in the number of IIP and the easing of CPI inflation led to a recovery in financials. As a result, the Sensex touched a new historic high beyond 52,000.

Then comes the bad news. Contrary to the market's expectations of a soft print, as well as the dip displayed by the CPI, the WPI inflation jumped to 2.0 per cent in January from 1.2 per cent in December, which may be a matter of concern.

Not to mention that the sharp rise in the WPI inflation in January was led by manufactured non-food products (core items), fuel and power, and crude petroleum and natural gas. It was despite the fact that the primary food inflation eased. Not to mention that oil prices have gone as high as Rs 94 per litre.

An ICRA finding says that WPI inflation is set to record large upticks over the course of the next few months. Again, hardening in the core-WPI inflation leaves no room for further rate cuts in this cycle.

Driven by a fairly broad-based moderation in the food inflation, the CPI inflation in January softened appreciably to a 16-month low of 4.1 per cent.

A host of the non-food categories recorded a rise in inflation in January. With inflation expected to resume an uptrend in February-March.

Coming back to IIP, the Indian industrial sector expectedly did return to a growth in December, the pace was tepid at 1.0.

In spite of the fact that many lead indicators have displayed a robust pace of expansion in the recent months, the subdued 1.0 per cent growth of the IIP in Q3 FY2021, clearly suggests that the recovery in the broader economy remains relatively measured. However, another school of thought feels that IIP is at comfortable position and an indicative of picking up of manufacturing activity post-lockdown. Though, the clearer picture will emerge only when it will reflect on the GDP data that gets released later this month.

The government's foremost job should be to see if the fuel price can be brought down by the reduction of indirect taxes on it.

To sum it up, while the general direction is of improvement in the reading, it may be too early to make any inference based on IIP numbers of a month of two.