India’s retail inflation based on the Consumer Price Index (CPI) stood at 5.09% in February, roughly the same level as in January, but the easing of price pressures in manufactured goods has been steeper, with “core” inflation falling to 3.3%, the lowest rate in the current CPI series with base year 2012.
The easing of headline inflation to a four-month low was helped by the statistical effect of a high base, as price pressures rose sequentially due to costlier food, data released by the National Statistical Office (NSO) showed on Tuesday. In February 2023, CPI inflation was at 6.44%.
Separate data released by the NSO on Monday showed factory output growth, measured by the Index of Industrial Production (IIP), eased to 3.8% in January from 4.2% in December, thanks to a high base effect. In January 2023, IIP had grown 5.8% y-o-y.
The latest inflation print is largely in line with the consensus estimate. An FE poll of 17 economists last week projected the headline figure to come in at 5%.
Despite easing price pressures, economists don’t expect policy repo rate cuts in the near-term, with many expecting rate cut cycle to begin with the October policy review. The repo rate currently stands at 6.5% and has remained unchanged since February 2023.
The average CPI inflation in January-February was 5.1%, and in order to be in line with 5% rate for Q4 FY24, projected by the Reserve Bank of India’s (RBI), the headline figure will have to ease further to 4.9% during March. But economists expect March CPI to come in at 5.1-5.2%.
Core inflation, which excludes volatile components of food and fuel, has stayed consistently below 4% since December and is expected to remain range-bound in the near-term as well.
“Continued weakness in commodity prices, lagged impact of previous rate hikes and waning pricing power is contributing to subdued core inflation prints,” said Garima Kapoor, economist, Elara Securities.
Food inflation, however, increased to 8.66% in February from 8.30% in January, due to increase in inflation rates of tomato, potato, milk, chicken, eggs, and fish among other items. Sequentially, prices of ‘meat and fish’, ‘cereals and products’, and ‘milk and products’ rose in February.
Food inflation remains the main driver of the headline figure, and is expected to be doing so going forward as well. The RBI’s February monetary policy statement had mentioned that the inflation trajectory in the coming months would be shaped by the “evolving food inflation outlook”.
“Food inflation internals (during February) were better than expected as well with sticky cereals inflation picking up less than assumed when seen on a monthly basis even as animal protein inflation that tends to be volatile was higher,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership.
“RBI is already striving to ease the monetary conditions by injecting more durable liquidity even as overnight rates stay volatile. But bar for change in policy rates is higher and RBI will need more information about global factors and risks to food inflation to pivot to rate cuts,” said Upadhyay.
Kotak Mahindra Bank’s Chief Economist Upasna Bhardwaj said: “We retain our view that RBI will remain cautious on volatile food inflation trajectory and hence prefer to remain in pause mode on rates till August policy.”
Meanwhile, within IIP, manufacturing output growth also eased to 3.2% in January from 4.5% in December, while mining’s production growth rose to 5.9% from 5.2%. Electricity’s output growth came in at 5.6% in January as against 1.2% in December.
On a month-on-month basis, manufacturing output declined 0.9% in January. Typically, manufacturing activity remains flat between January and December. In the past 11 years, the manufacturing production has risen on average merely 0.1% between the two months.
January recorded a decline in output of food products, textiles, and petroleum products from December, but saw a rise in production of basic metals.
Within the use-based category, output of five of six items rose y-o-y, with consumer durables output growth coming in at 10.9% during the month. The production of consumer-durables, however, contracted 0.3% on year in January.
“The consumer durables output jumped notably by 10.9% supported by a favourable base. However, the contraction in consumer non-durables remains reflective of the weakness in consumption. It is concerning that consumer non-durables performance has remained feeble in the last few months,” said Rajani Sinha, chief economist, CareEdge.