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Two high frequency economic indicators – retail inflation and industrial production growth – brought cheer to the government on Wednesday. Retail inflation based on Consumer Price Index (CPI) eased to 5.66 per cent in March as against 6.44 per cent in February while industrial growth based on Index of Industrial Production (IIP) moved up to 5.6 per cent in February as against 5.4 per cent of January.
Apart from strong base effect, decline in vegetable and oil prices along with other items brought down retail inflation below the upper tolerance level of targeted inflation range of 2-6 per cent after two months. It justified Monetary Policy Committee’s action of interest rate pause earlier this month while simultaneously leading to expectations that the pause will continue. There is also expectation that the base effect will further bring down print inflation.
Statistics Ministry data showed that while vegetable and oil price movement continue to be in the negative zone, prices of spices, milk and cereals still appear to be high though the pace has slowed down. In fact, there is a reversal of the trend of nine months of rising cereals and products inflation.
Manufacturing sector bolstered overall industrial growth in February. | Photo Credit: GANESAN V
Heatwave impact
Aditi Nayar, Chief Economist with ICRA, said unless the feared heatwave leads to a rapid rise in prices of perishables, inflation may report a substantial base-effect led drop to around 5.0-5.2 per cent in the next two prints. This, she said, will reinforce the MPC’s decision to pause in April 2023. With reasonably healthy reservoir levels and the El Nino expected to materialise only in the second half of the monsoon season, kharif sowing may not be impacted. However, she said, “any subsequent deficiency in monsoon rainfall could affect yields and food inflation, which along with any further hardening in crude oil prices remains a risk for the inflation trajectory.”
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, said the RBI’s projection of 5.2 per cent CPI inflation for FY24 appears to be on track. Core inflation for March, too, has declined to 5.8 per cent from 6.1 per cent in February. “This is good news from the market perspective. Bulls can take the rally forward on the assumption that we are at the peak of this rate hiking cycle,” he said.
Industrial growth
Manufacturing sector bolstered overall industrial growth in February. However, some sub-sectors were still laggardly. Rajani Sinha, Chief Economist with CareEdge, said while there has been slight improvement in IIP growth for February, output of some export-intensive sectors such as textile, apparel and leather products continue to bear the brunt of the global deceleration of demand. “Moreover, contraction in the output of consumer durables goods for the third straight month is concerning,” she said, cautioning about global uncertainty.
In a note, India Ratings & Research’s (Ind-Ra) Chief Economist Sunil Kumar Sinha and Senior Analyst Paras Jasrai said they expect the IIP to slow down to around 4 per cent in March 2023 which would take the annual growth for FY23 to 5.2 per cent. “Ind-Ra, therefore, believes that despite encouraging signs, a broad based and sustainable industrial recovery is some distance away and will require both fiscal and monetary policy support,” their note concluded.
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