Retail inflation eases into RBI comfort band, factory output growth slips to five-month low

“IIP growth at 1.1% is a major disappointment as we had expected a better number of 3.5%. The year-end phenomenon which goes along with production being ramped up in march did not happen this time. High build-up of inventory in the previous months to meet the pent up demand is one reason why companies were cautious in expansion as the working capital costs have gone up. The IIP numbers do not gel with the PMIs (purchasing managers’ index) announced. Hence we need to view the PMIs with caution,” Madan Sabnavis, Chief Economist, Bank of Baroda said.

Consumer durables output, which indicates consumption demand, continued to contract for the fourth consecutive month at (-)8.4 per cent in March as against (-)3.1 per cent in the year-ago period. Consumer non-durables, which is an indicator for fast-moving consumer goods, also contracted 3.1 per cent in March as against 4.4 per cent contraction in the year-ago period. “It appears that the lagged impact of high inflation has weighed on the consumer durables and consumer non-durables segments. While consumer durables have been contracting now for four straight months, the positive trend in consumer non-durables since November 2022 was short-lived as the segment plunged 3.1% yoy in March 2023. With the moderation of inflationary pressures in FY24, both of the segments are expected to recover to around 2%-3% each in the ongoing fiscal year (FY23: 0.5% each),” Sunil Kumar Sinha, Principal Economist, India Ratings said.

Electricity output contracted 1.6 per cent in March as against 6.1 per cent growth last year. Capital goods output, which is indicative of investment demand, recorded growth of 8.1 per cent in March as against 2.4 per cent a year ago.

Retail inflation marked the first sub-5 per cent print since November 2021, partly driven by a high base and moderation in prices of some food items. While speaking at a book launch event in Mumbai, RBI Governor Shaktikanta Das said the inflation print shows monetary policy is on the right track. “…the inflation number for April which was released today was at 4.7 per cent. It gives me and my colleagues in the Reserve Bank to say with a good amount of confidence that the monetary policy is on the right track,” Das said.

In April 2023, food inflation, based on consumer food price index, eased to 3.84 per cent from 4.79 per cent a month ago and 8.31 per cent a year ago. Among the sub-groups, while vegetables continued to remain in deflationary mode at (-)6.5 per cent, cereals inflation stood at 13.67 per cent. Inflation rate for milk and products also eased marginally to 8.85 per cent in April from 9.31 percent in March.

“While base effects played a role, sequentially too, price pressures are easing…basis, the sequential increase (0.5% m/m) was mostly driven by perishable food prices as the usual summer seasonality kicks in, though it was partly mitigated by loss of momentum in non-perishables and falling energy costs. We expect headline CPI to stay between 4% and 5% for the foreseeable future and are tracking May headline CPI at 4.3% y/y. For FY23-24, we continue to forecast inflation to average 4.7% in FY23-24. The moderation in inflation, which is expected to continue in the near term, suggests that the RBI’s hiking cycle is over,” Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays said.