Moderation In Inflation May Lead To Pause In Interest Rate Hike This Fiscal

The welcome development in Indian economy is that Inflation, riding on base effect, has moved below five per cent mark in April this year. But worrying factor is slowdown in Industrial and consumer goods production as IIP growth decelerated to 1.1 per cent in March this year. As a result rating agency Crisil expects India’s GDP growth to slow down to six per cent in the current year 2023-24 as against 7 per cent in just ended financial year 2022-23.

This is not a good news as it will worsen the job situation in the country, which is none too comfortable this year. However with RBI expected to cut interest rates in the latter part of this financial year in the face of slowing inflation, GDP growth may pick up next year with the increase in capital expenditure.

Crisil Market intelligence and analytics is right in saying that Inflation moving below 5 per cent will however give relief to the Monetary Policy Committee, which in its recent policy review kept the repo rate unchanged leaving room to assess the impact of cumulative rate hikes on inflation.

Reserve Bank of India has been hiking short-term rates for a while before the recent policy review in view of the rising inflation. In April consumer price index slowed down to below 5 per cent at 4.7 per cent, which was clear one per cent down from 5.7 per cent in the previous month March. According to Crisil chief economist Dharmakirti, a considerable part of the fall is due to a high base effect of last year when the Russia-Ukraine conflict intensified, pushing up fuel, metal and food prices.

Accordingly, there was an across-the-board benefit. Correcting for seasonal elements, there is perceptible sequential easing across most categories except pulses, sugar, spices, education and personal care and effects. Another noticeable aspect is the still-elevated inflation rates in cereal (at 13.7%) and milk (8.8%) and the recent creep-up in pulses (5.3%).

With the rabi harvest entering the market some respite for cereal and pulses prices could be felt. But the looming El Nino and monsoon threat causes worry. Similarly high procurement prices are expected to keep milk inflation high. Elevated inflation in these essentials can continue to pinch pockets. Expectation is that CPI inflation will average 5 per cent this fiscal as against 6.7 per cent last fiscal on the assumption of a normal monsoon.

For now, the finance ministry expects the MPC to maintain a pause as it continues to watch the impact of past rate hikes. As growth slowdown seeps in and inflation moderates, the RBI may cut rates by the end of this fiscal. This is a welcome development as interest rate cuts will spur industrial activity and thereby growth next year.

In the current year what is worrisome is the broad-based slowdown in the manufacturing. The latest Index of Industrial Production (IIP) data suggests a slowdown across the manufacturing sector. Both consumer and industrial goods growth moderated, with slowdown more pronounced for the former, Joshi said.IIP growth decelerated to 1.1% on-year in March compared with 5.8% previous month, driven by slowing manufacturing, and falling electricity production.

Within manufacturing, sharpest fall was seen in consumer durables (-8.4% vs -4.1%), followed by consumer non-durables (-3.1% vs 12.1%). Consumer durables declined consistently for the past 4 months, largely indicating hit from falling exports, and some impact of rising interest rates on domestic demand.

Support from infrastructure activity also seemed to wane towards the end of the fiscal, as reflected in IIP for infrastructure and construction goods slowing for fourth consecutive month (5.4% vs 8.4%). This should reverse as central government restarts capex push from new fiscal, Joshi said.

Industrial growth will continue to face headwinds from falling exports and moderating domestic demand. External demand is expected to be a bigger drag as western advanced economies face a sharper tightening in financial conditions, Joshi feared. While rising interest rates will moderate domestic demand as well, the key monitorable for India will be monsoon, and how it impacts rural income prospects.

Moderating inflation is good news for the people as any rise in prices is regarded as tax on common man. But the pick-up in the Indian economy so as to get back to high growth path will have to wait for some more time as 2024-25 could see actual big investments flowing in. (IPA Service)