Retail Inflation At 3-Month High; Factory Activity Rebounds

NEW DELHI: India’s retail inflation inched up to a three-month high of 5.6% in November from 4.9% in the previous month, while industrial production rebounded to a 16-month record of 11.7% in October, aided by a festive surge and a favorable base, official data released Tuesday showed. Interest rates are likely to stay where they are and any easing will likely happen only in the next fiscal year, experts said.

The Index of Industrial Production (IIP) had risen 6.2% in September after a sharp uptick of 10.3% in August. A strong start to the third quarter with better-than-expected industrial growth was marked by sharp rise in the capital goods category.

This hinted at a pickup in industrial investment. “The late onset of the festive season has contributed to this increase, which if sustained can take overall growth to a higher trajectory,” said Madan Sabnavis, chief economist, Bank of Baroda.

India’s GDP rose 7.6% in the second quarter, given the rise in the manufacturing sector and investments, pushing growth in the first half to 7.7% and prompting the Reserve Bank of India (RBI) to raise its FY24 growth forecast to 7% from 6.5%.

A fall in core inflation but a sharp rise in food inflation, which makes up about half of the consumer price basket, will likely push the RBI’s Monetary Policy Committee to keep interest rates on hold and begin easing only in the next fiscal year. “The possibility of a rate cut still remains only in Q2 of next year when inflation comes down to 4%,” said Sabnavis.

Aditi Nayar, chief economist, Icra, said rates are likely to remain on hold in the near term with a “shallow rate-cut cycle of 50-75 bps commencing in the August 2024 meeting.”

The RBI kept its benchmark interest rate unchanged for a fifth straight policy meeting last week. Governor Shaktikanta Das warned against rising food prices.

While core inflation eased further to a 45-month low of 4.1% in November, food inflation rose to 8.7% in November from 6.6% in the preceding month. Cereals, spices, and pulses inflation remained in double digits in November.

Cereal inflation has been in double digits for 15 months, whereas this is the sixth month of pulses recording over 10% inflation. Vegetable inflation increased to 17.7% in November compared with a 2.8% rise in the previous month, as onions recorded an 86% increase with tomato inflation rising to 11.4%. Tur, which accounts for a significant weight in pulses inflation, was up 42.4% from last year. “There are clearly supply issues here and a lower level of kharif output will exert pressure on inflation,” said Sabnavis.

Economists called for more interventions by the government to cool commodity prices. Prices of vegetables such as onions and tomatoes have surged after erratic rains led to shortages. The government has already restricted a wide range of food staples, including onions, wheat and rice, from export. “Given the lingering uncertainty around kharif production and rabi sowing prospects, high food prices cannot be shrugged off as entirely transient and could feed into the inflationary expectations,” said Rajani Sinha of Care Ratings, adding that the supply-side interventions become crucial at this juncture to ensure a sufficient buffer stock of essential food items.

Experts said inflation is likely to remain high in December.

“An unfavorable base is further expected to push CPI inflation higher to around 5.8-6% in December. However, with the arrival of fresh crops in the market during January-March, the headline inflation could ease to 5.1% by the fiscal year-end,” Sinha from CareEdge said.

All three major sectors of industrial activity recorded double-digit growth in November, with manufacturing, which accounts for 77% weight in the index, rising 10.4% in November. “Growth in the infrastructure and construction goods category (11.3%) remains supported by central and state government capex. The rise in capital goods IP by 22.6% also signals a pickup in capex and investment,” said Rahul Bajoria of Barclays.

Festival demand also pushed consumer durable growth to 15.9%, whereas non-durables recorded 8.9% growth in October.

However, experts noted that IIP growth is likely to decline in November due to fewer working days amid the festive season and an unfavorable base acting as a drag.

Source: The Economic Times

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