Inflation at a four-month high in December, industrial production at an eight-month low in November


Retail inflation rose marginally to a four-month high of 5.7% in December compared with 5.6% in the previous month, owing to food inflation inching closer to double digits, according to data released Friday.


On the other hand, industrial output expanding at its weakest pace since March 2023 rising 2.4% in November compared with 11.6% in October, pulled down by an unfavourable base and a decline in manufacturing activity during the festival month, according to another data released by the government.


Experts indicate that high inflation coupled with strong growth indicates that there may be a long pause in Reserve Bank of India’s policy stance.


“Rate cuts appear distant, and are unlikely to emerge before August 2024, with a stance change expected in the preceding policy meeting,” said Aditi Nayar, chief economist, Icra.


The Indian economy is likely to grow 7.3% in FY24, higher than previous year’s growth number of 7.2% and RBI’s forecast of 7% for FY24, according to first official estimate based on eight month data released last week.


“Strong economic growth and inflation averaging more than 5% in FY24 suggests a long pause in policy rates,” said Ind-Ra economists Sunil Kumar Sinha and Paras Jasrai.


The Reserve Bank of India held the policy rate at 6.5% for the fifth consecutive time at its meeting in December. The next monetary policy committee meeting is scheduled post the interim budget from February 6-8.


Food disturbs, core helps


The increase in retail inflation was led by food inflation, which came in at a four-month high of 9.5% in December compared with 8.7% in the previous month, but the core inflation falling below 4% for the first time in the post-pandemic period kept the effects contained.


“The upside was contained with the sustained deflation in the fuel and light category and a moderation in core inflation just below the RBI’s target of 4%,” said Rajani Sinha, chief economist of CareEdge.


Vegetable prices rose 27.6% in December owing to onion prices rising 74% in December, while tomato prices rose 33.5%.


Besides vegetables, fruits, pulses and spices all recorded double digit inflation in December.


“Despite marginal sequential moderation, food prices remained largely sticky, which drove up the year-over-year growth in December. The persistently high inflation in specific food categories, such as cereals, pulses, and spices, raises concerns about the potential broadening of price pressures,” Sinha added.


Cereal inflation, on the other hand, declined below 10% for the first time in 15 months, but concerns still remain.


“The outlook for the inflation for certain items like rice, wheat and pulses remains somewhat vulnerable, given the estimated fall in annual kharif production, as well as the YoY lag in the ongoing rabi sowing season amid El Nino conditions,” Nayar from Icra said.


Economists expect inflation pressures to ease in the coming months, given base effects and arrival of new crop.


“We expect inflation in January 2024 to decline to 5.3-5.5% range mainly due to base effect,” said Ind-Ra economists.


Output concerns


All three major sectors of industrial activity underperformed, with mining slowing down to 6.8% in November from 13.1% in the previous month, while electricity came down to 5.8%, a five-month low.


Manufacturing, which accounts for over three-fourth of the index, grew 1.2%, compared with 10.2% in October and 6.7% in November 2023.


“While an unfavourable base resulted in a broad-based growth moderation, month-on-month contraction seen in the electricity and manufacturing sectors further constrained the overall IIP growth,” said Sinha from CareEdge.


Both consumer durables and non-durables, which reflect consumption demand, showed a contraction in November of 5.4% and 3.6%, respectively. The contraction in consumer durables was much larger as the sector had expanded 15.9% in the previous month.


“Consumer goods should have picked up in the festive season but have not. This means that the scope for revival is limited. Don’t expect corporate results in this sector to do well on sales,” said Madan Sabnavis, chief economist, Bank of Baroda.


Economists contend that pre-election spending could likely aid in some revival. India is scheduled to hold general elections in the next quarter.


Besides consumption, capital goods also contracted in November.


“17 of 23 sectors showed negative growth with capital goods going down. All indicative of limited investment concentrated in metals cement and auto,” Sabnavis said.


Performance is expected to stay muted in the coming months. Ind-Ra expects the IIP growth to remain muted in the low single digits in December 2023.


Source- Economictimes

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