Inflation slipped to 3-month low of 5.1%

Supported by reduction in food prices and favourable base effect, retail inflation based on Consumer Price Index (CPI) slipped to a three-month low of 5.1 per cent in January. Another high-frequency economic indicator, industrial growth based on Index of Industrial Production (IIP), moved up to 3.8 per cent in December.

Retail inflation was 5.7 per cent in December, while industrial growth rate was 2.4 per cent in November. Based on the trend in inflation number, experts expect rate cut cycle to start during July-September quarter of FY 2024-25. While headline retail inflation cooled in January, it has been on the RBI’s medium-term target of 4 per cent for 52 consecutive months. On the positive side, inflation has been within the tolerance range of 2-6 per cent for the fifth month in a row.

• Also read: Retail inflation likely to be above 5% for January

Commenting on the latest reading of headline inflation, Aditi Nayar, Chief Economist with ICRA, said the correction in the inflation for food and beverages was led by a favourable base effect. While rabi sowing has caught up with last year’s level, reservoir storage remains well below the year-ago levels in most regions, continuing to imbue caution into the outlook for the rabi harvest. Swati Arora, Economist with HDFC Bank said that food inflation still remains elevated, with vegetables prices clocking a double digit growth.  “A month-on-month rise in cereal inflation is worrisome,” she said.

For the remaining months of the current fiscal, Nayar projected  CPI inflation to ease below 5 per cent in February-March, and average at 5.3 per cent in FY2024. “We estimate the CPI inflation at 4.6 per cent in FY2025, broadly in line with that of the MPC, based on the assumption of a normal monsoon,” she said. Arora also has the same number for FY25. “We expect the RBI to start its rate cut cycle by August and change its stance in the June policy,” she said.

• Also read: MPC is right in focusing on its inflation mandate

Industrial Growth

Meanwhile, manufacturing saw better performance in December, pushing the overall industrial growth rate to 3.8 per cent. Rajani Sinha, Chief Economist with CARE, said encouraging sequential growth across the mining, manufacturing and electricity sectors has supported growth during the month despite an unfavourable base. “The other noteworthy aspect was the rebound seen in consumer durables and non-durables output which grew by 4.8 per cent and 2.1 per cent, respectively. However, the sustenance of this trend remains critical for industrial activity in the coming months,” she said.

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