India Macro Weekly: Inflation strengthens, merchandise trade disappoints

For the fortnight ending November 18, 2017:

• IIP growth came in at 3.8%, which represents a softening from the same month of the previous year, but is still the third consecutive month of growth on account of a broad based firming up across categories.
• CPI inflation increased to a 7 month high of 3.6% in October 2017, on a broad based pickup in inflation components from the previous month. Notably, core inflation softened, indicating that the buildup in CPI inflation is on account of more volatile inflation components, namely, food and fuel.
• WPI inflation levels reached 3.6% as well, exactly the same level as CPI inflation, after staying below the latter for the past four months. Food inflation has increased under WPI inflation as well, an indicator worth watching given it’s the potential for pass through to the final consumer and its significant weight in CPI.
• On the external sector front, the Merchandise Trade report was a disappointment as exports contracted in October, while imports’ growth subsided and trade deficit hit the highest levels in almost two years.
• The Foreign Tourists’ report continued to look robust as both foreign tourist arrivals and foreign exchange earnings continued to show strong growth.
• In Policy,  the centre dramatically reduced rates of Goods and Services Tax (GST)  across categories. Notably, the number of goods falling under the 28% tax rate was reduced from 244 to 50. Tax reductions also took place across other tax heads. In the services category, the restaurant business saw a tax reduction.
• In Financial Markets, oil prices rose yet again last week, inching closer to USD 60/bbl before subsiding, while India's 10 year bond yields rose to over 7% after 1 year.