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Retail inflation based on the Consumer Price Index (CPI) rose marginally to 4.48 per cent in October from 4.35 per cent the previous month. At the same time, industrial growth based on the Index of Industrial Production (IIP) decelerated on a sequential basis to 2.5 per cent in September.
Economists say that as the retail inflation is still in a comfortable zone, the Monetary Policy Committee (MPC) is unlikely to change its stance on the policy interest rates in its December meeting.
However, as there is expectation of inflation rising over the next few months, there could be some tightening of the rate in February, when the MPC will meet for the last time this fiscal year.
Data released by the National Statistical Office (NSO) show that inflation for food and beverages rose in October mainly on account of higher vegetable prices.
Edible oil is still showing very high inflation of over 33 per cent, but egg prices appear to be softening. However, the biggest worry is that core inflation (headline inflation minus inflation of volatile items such as fuel and food) is still high as it moved to 5.8 per cent.
Energy prices
Economists say that the cut in excise duty on petrol/diesel will provide a reprieve to inflation, but high global commodity prices, including of energy, pose a threat for inflation.
Aditi Nayar, Chief Economist with ICRA, said the opportune timing for the tax cuts on fuels, which should soften the November CPI inflation print, will help to prevent premature tightening in the December MPC review, and allow the Committee to remain growth-supportive until the demand revival becomes fully entrenched. ICRA’s calculations suggest that the direct impact of the reduction in the central excise duty on petrol and diesel on the November CPI inflation print would be 30-35 bps, with a somewhat muted impact of the varied VAT cuts by States.
“As the base effect wears off, and the pressures related to coal, metals and logistics costs come to the fore, we expect the CPI inflation to return to an uncomfortable range of 5-6 per cent in December-March FY2022,” Nayar said while adding that the MPC is likely to change the monetary policy stance to neutral only after there is additional evidence that the domestic demand revival has become durable, which is likely in the February 2022 review.
Industrial growth
“We expect this to be accompanied by a 15 bps hike in the reverse repo rate by the RBI,” she said.
Industrial growth on month-on-month basis declined in September, though it recorded a growth of 3 per cent on annualised basis. Rajani Sinha, Chief Economist with Knight Frank India, said the monthly deceleration is mainly because of the base effect.
Even on a sequential basis, the IIP has declined and this is a cause of concern. While the infrastructure sector has shown a sequential decline, the silver lining is that on a month-on-month basis, the consumer goods segment — specifically the durables sector — has shown a strong improvement.
“Going forward, for sustainable economic momentum in 2022, the critical driver would be boost to consumer spending through demand-stimulating policies. Eventually, private investment will also improve as capacity utilisation level improves going forward,” she said.
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