Retail inflation hit an 11-month low of 5.88% in November, dropping below the upper limit of the Reserve Bank of India’s (RBI’s) medium-term target of 2-6% after a gap of 10 months, on a sharp moderation in price pressure in food. But industrial production shrank 4% in October, the second contraction in three months and the worst since August 2020, reflecting the impact of an unfavourable base and tepid export demand.
While the base effect remains favourable, sticky core retail inflation (it still stood at 6% in November, according to India Ratings), on top of elevated price pressure in services and certain miscellaneous items, could prevent headline inflation from easing sharply in December, analysts said. In fact, some expect it to rise marginally to about 6% in December.
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Still, the sharper-than-expected moderation in November means retail inflation could undershoot the RBI’s latest forecast of 6.6% for the December quarter.
The magnitude of the December inflation and the fiscal focus of the Budget for FY24 will determine whether the central bank will pause rate hikes in February. RBI governor Shaktikanta Das last week said the central bank would keep “Arjun’s eye” on the evolving inflation dynamics and that the war on price pressure would continue.
The index of industrial production (IIP), meanwhile, could reverse the latest contraction and register decent growth in November, aided by a favourable base, the analysts said. The base effect remains favourable until March 2023.
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While any moderation in global commodity prices in the wake of interest rate hikes by key central banks will augur well for a net importer like India, the Ukraine war will continue to impart uncertainty to the food and energy prices outlook and pose upside risks to imported inflation. There is also considerable uncertainty over whether the western price cap on Russian oil below the market price will help bring down global energy prices.
In its latest monetary policy statement, the RBI said: “The correction in industrial input prices and supply chain pressures, if sustained, could help ease pressures on output prices; but the pending pass-through of input costs could keep core inflation firm.”