At 5.1% in Jan, retail inflation at 3-month low; factory output at 3.8% in Dec

Economists said the continued fall in core inflation indicated that RBI’s monetary policy tightening is having an impact but elevated food inflation continues to be a worry. “This (core inflation) is a 50-month low and suggests that RBI’s monetary policy perhaps is working by compressing the demand. But the headline is still higher than the targeted 4% due to higher food inflation and continues to be a worry area for RBI because it has the potential of impacting the core inflation via wage-price spiral,” a note by India Ratings’ Principal Economist Sunil Kumar Sinha and Senior Analyst Paras Jasrai said.

Food inflation, as measured by the Consumer Food Price Index, eased to 8.3 per cent in January as against 9.53 per cent in December and 6 per cent in the year-ago period. Urban food inflation moderated to 9.02 per cent in January from double-digit 10.42 per cent food inflation in December, while rural areas registered 7.91 per cent food inflation in January as against 8.49 per cent in the previous month.

Inflation rate for the food and beverages segment, which carries a weight of 45.86 per cent in the CPI, eased to 7.58 per cent in January from 8.70 per cent in December. Cereals and products inflation marked the sixth consecutive month of decline, dropping to 7.83 per cent in January after remaining in double digits for 15 consecutive months during September 2022 to November 2023.

Vegetables inflation inched lower to 27.03 per cent in January from 27.64 per cent in December, while pulses inflation rate eased to 19.54 per cent from 20.73 per cent. Miscellaneous inflation, which broadly indicates price change for services, inched lower to 3.82 per cent in January from 4.07 per cent in December. Fuel and light segment, though in negative territory, showed an uptick at (-)0.6 per cent in January from (-)0.99 per cent in December.

For the future inflation trend, economists projected a cautionary outlook for rabi harvest and thus, expect a shallow rate cut cycle by the RBI. “While rabi sowing has caught up with last year’s level, reservoir storage remains well below the year-ago levels in most regions, continuing to imbue caution into the outlook for the rabi harvest…we project the CPI inflation to ease below 5% in February-March 2024, and average at 5.3% in FY2024. Thereafter, we estimate the CPI inflation at 4.6% in FY2025, broadly in line with that of the MPC, based on the assumption of a normal monsoon. The MPC’s expectations around the growth outlook and its forecast that the CPI inflation will moderate while remaining above the 4% target, reinforces our view of a likely shallow rate cut cycle,” Aditi Nayar, Chief Economist, ICRA said.

Ten of the 22 major states/ UTs registered an inflation rate above the headline inflation rate of 5.10 per cent in Janaury, with the highest rate in Odisha (7.55 per cent), followed by Telangana (6.34 per cent), Haryana (6.24 per cent), Gujarat (6.21 per cent) and Karnataka (6.11 per cent).

On the industrial output front, manufacturing, which accounts for 77.6 percent of the weight of the IIP, grew by 3.9 per cent in December as against 1.2 per cent in the previous month and 3.6 per cent in the year-ago period. In absolute terms, it inched up to 150.6 in December from 139.2 in November and 144.9 in the year-ago period. Mining and electricity output recorded growth of 5.1 per cent and 1.2 per cent, respectively as against 10.1 per cent and 10.4 per cent in the year-ago period.

Output of capital goods — an indicator of investment — rose to 3.2 per cent in December from a 13-month low of (-)1.1 per cent in November. It stood at 7.8 per cent in the year-ago period. On the consumption front, consumer durables output, which reflects consumption demand, rose to 4.8 per cent in December from a five-month low of (-)5.5 per cent in November and (-)11.2 per cent in the year-ago period. Consumer non-durables output, which reflects fast-moving consumer goods, also improved to 2.1 per cent in December from a 13-month low of (-)3.3 per cent growth in November.

“IIP growth rebounded in December, supported by a sequential upturn in the manufacturing sector. A pick up in capex growth supported ‘infrastructure and construction’ goods growth. RBI and PMI surveys suggest firms remain optimistic on demand conditions in the manufacturing sector,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays.

As per the IIP data, 15 of the 23 sectors in manufacturing registered growth in December, with the manufacture of other transport equipment, fabricated metal products, except machinery and equipment, basic metals and coke and refined petroleum products among the highest growing sectors. Cumulatively, during April-December, the first nine months of the financial year, factory output has grown 6.1 per cent as against 5.5 per cent in the year-ago period.