Two key macroeconomic indicators, released on Monday, gave mixed signals. While retail inflation based on the Consumer Price Index (CPI) slipped to an 11-month low of 5.88 per cent in November as against 6.77 per cent in October, industrial growth based on the Index of Industrial Production (IIP) contracted by 4 per cent as against 3.2 per cent growth in September.

With this, the retail inflation rate is now below the upper tolerance level of 6 per cent for the first time in the current fiscal. The expectation is that the Monetary Policy Committee (MPC) may further slow the policy rate hike, and the next meeting could restrict the hike to 25 basis points.

The decline in retail inflation is mainly due to a sharp decrease in food price inflation. Consumer Food Price Inflation moderated significantly in November, to 4.67 per cent, which is way lower than the 7.01 per cent recorded in October 2022. The absolute decline in prices of vegetables, ‘oils & fats’ and ‘sugar and confectionery’ contributed significantly to the reduction in food price inflation.

“The measures taken by the government to contain food prices helped bring inflation below the RBI tolerance limit of 6 per cent. To soften the prices of cereals, pulses, and edible oils, appropriate trade-related measures have been undertaken. The impact of these measures is expected to be felt more significantly in the coming months,” the Finance Ministry said in a series of tweets.

Terming sub-6 per cent retail inflation as a surprise, Swati Arora, an economist with HDFC Bank, said the core inflation rate still remains sticky and elevated above 6 per cent and is likely to hover around that level until Feb/March 2023. “The RBI in its last policy raised its concern on inflation, especially the persistence of core inflation. The RBI is likely to continue its battle to fight inflation, delivering a rate hike of 25 bps in its next policy meeting,” she said.

Agreeing with her, Sunil Sinha, Principal Economist with India Ratings & Research (Ind-Ra), said that while headline inflation is under the RBI’s target, sticky core inflation needs continuous monitoring and the RBI is unlikely to lower its guard against inflation. “While the extent of rate hike has reduced, Ind-Ra still expects the central bank to undertake 25bp hike in February 2023 monetary policy,” he said

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Rajni Sinha, Chief Economist, feels the upward pressure on services inflation has led to the strengthening of core inflation. RBI will remain cautious to prevent inflationary expectations from spiralling upward. However, “with disappointing data from the manufacturing sector, the Central Bank’s decision to go for another rate hike in the February meeting will be a close call,” she said.

IIP data

According to official data released on Friday, the contraction in industrial production in October was mainly due to a decline in the manufacturing sector’s output and subdued growth in mining and power generation. Commenting on that latest number, Aditi Nayar, Chief Economist with ICRA, said year-on-year growth of most available high-frequency indicators improved in November relative to October 2022, partly reflecting the subdued base owing to the relatively late onset of the festive season in 2021 vis-à-vis 2022. “Given that the YoY growth in both of these months is impacted by base effects, we believe that an average performance of October and November 2022 would provide a better gauge of the actual growth momentum and demand dynamics,” she said.

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Govt not to make RBI report public

The government on Monday ruled out making public the RBI report detailing the reasons why the central bank could not keep inflation within the targeted 6 per cent upper limit for the three consecutive quarters.

“Yes, sir, the RBI has furnished a report to the Central Government, as mandated under Section 45ZN of the RBI Act, 1934, and Regulation 7 of the RBI Monetary Policy Committee and Monetary Policy Process Regulations, 2016,” minister of state for finance Pankaj Chaudhary said in a written reply.

The said provisions of the RBI Act, 1934, and regulations therein do not provide for making the report public, he said.