Vegetables, along with pulses and fruits, pushed retail inflation to a four-month high of 5.7 per cent in December. Simultaneously, weak manufacturing dragged industrial growth to an 8-month low of 2.4 per cent in November.

Retail inflation based on the Consumer Price Index (CPI) was 5.5 per cent in November, while industrial growth rate based on the Index of Industrial Production (IIP) were 11.6 per cent in October. After the latest readings, experts see both high-frequency economic indicators to dip on a sequential basis. Also, they do not expect any change in the policy interest rate.

‘Positive surprise’

One positive development on the inflation front is lower core inflation. “A positive surprise in the headline inflation was on account of lower-than-expected food inflation and softer-than-expected core inflation,” Swati Arora, an economist with HDFC Bank, said while adding that core inflation is expected to remain below 4 per cent during January-March, FY24.

Core inflation (taking out inflation of volatile products such as food and fuel) dropped to a 48-month low of 3.9 per cent in December as against 4.02 per cent in November. This, as Aditi Nayar, Chief Economist with ICRA, explained, counterbalances the elevated food inflation print.  The outlook for 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.

“Looking ahead, we forecast the CPI inflation to moderate appreciably to 5.2 per cent in January 2024, aided by a dip in the food inflation print on account of an adverse base. Nevertheless, rate cuts appear distant and are unlikely to emerge before August 2024, with a stance change expected in the preceding policy meeting,” Nayar said.

Upasna Bhardwaj, Chief Economist with Kotak Mahindra Bank, said she expects the MPC (Monetary Policy Committee) to continue to focus on their 4 per cent inflation target and keep the repo rate, and their policy stance is likely to remain unchanged in February. “We expect the RBI to allow liquidity conditions to ease in the coming months to let the operating target rate soften towards the repo rate before shifting stance— a move that is likely in QFY25,” she said.

Industrial Growth

The weak performance of various sectors, coupled with a higher base, was responsible for lower industrial growth. Experts said the current trend is fragile. A note prepared by Paras Jasrai (Senior Analyst) and Sunil Kumar Sinha (Principal Economist) with India Ratings & Research said that the fragile nature of the recovery becomes even more evident in the context of sub-industry-wise (2-digit) data, with only seven industries having a higher production level than the pre-COVID period in November 2023 (a 13-month low).

High-frequency indicators such as petroleum consumption, coal, steel production, and e-way bills grew in the range of 2.6-13.2 per cent in December 2023 and point towards some uptick in economic activity (range during November 2023: negative 1.1-11.4 per cent. “Given the weak consumption trends (with inflation hovering above 5 per cent) and the fragile recovery, Ind-Ra expects the IIP growth to remain muted in low single digits in December 2023,” the note concluded.