Retail inflation eases in January, industrial output expands in December

Retail inflation cooled to a three-month low in January, while industrial production rose in December despite global headwinds and microeconomic challenges as the Indian economy reversed course, government data showed.

Industrial output increased by 3.8% in December after declining to 2.4% in November, the lowest in the eight months, while Consumer Price Index (CPI)-based inflation declined to 5.1% in January from 5.7% a month ago, statistics ministry data showed.

Manufacturing data in the April–December comprising primary, capital, intermediate, infrastructure and construction goods, consumer durables, and consumer non-durables manufacturing data showed recovery in almost all categories.

The Index of Industrial Production (IIP) expanded by 6.1% in April-December from the comparable period of the previous year.

Out of the top-performing manufacturing sectors, basic metals, machinery and equipment, pharmaceuticals, medicinal chemicals, and botanical products showed growth of 12%, 11%, and 10%, respectively.

“The positive aspect was the improvement seen in manufacturing output, which grew by 3.9% in December following a muted growth of 1.2% last month,” Rajani Sinha, chief economist at rating agency CareEdge said.

An encouraging sequential growth across mining, manufacturing, and electricity sectors supported growth during the month despite an unfavorable base, Sinha added.

A rebound in consumer durables and non-durables output, which grew by 4.8% and 2.1%, respectively, was also notable, Sinha said, while cautioning: “The sustenance of this trend remains critical for industrial activity in the coming months.”

Retail inflation breaks upward trajectory

“The moderation in headline inflation in December was in line with our expectations, driven by a favorable base and a gradual sequential easing, particularly in the food basket. Ongoing deflation in the fuel and light category also continues to support inflationary prints,” Sinha said.

Core inflation remained subdued and moderated further, consistently staying below the 4% threshold for two consecutive months, mainly due to muted consumption demand and a moderation in global commodity prices, she added.

Despite a sequential moderation in vegetable and fruit prices within the food basket, inflation of non-perishables such as spices and pulses continued to show double-digit trends, warranting close monitoring. High inflation in specific food categories, including cereals, pulses, and spices, poses a risk of potentially broadening price pressures and de-anchoring inflationary expectations, Sinha added.

“A notable recovery in rabi (winter) sowing over the past few weeks is a positive signal for food inflation. The government is actively implementing supply-side measures, such as increasing the quantum of the open market sale scheme  for wheat and rice, and reducing stock limits for traders and wholesalers to curb price pressures,” Sinha said.

Inflation may ease further

Aditi Nayar, chief economist of credit rating agency ICRA, said, “We project the CPI inflation to ease below 5% in February-March and average at 5.3% in FY24. After that, we estimate CPI inflation to be 4.6% in FY25, broadly in line with the monetary policy committee (MPC), based on the assumption of a normal monsoon. ”

The MPC’s expectations around the growth outlook and its forecast that the CPI inflation will moderate while remaining above the 4% target reinforces our view of a likely shallow rate cut cycle, Nayar said, adding that the rating agency foresees cumulative rate cuts of 50-75 basis points, commencing in the August meeting and a change in stance in the preceding review after there is some visibility on the monsoon turnout.

One basis point is one-hundredth of a percentage point.