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Below the Views on CPI and IIP by Rajani Sinha, Chief Economist, CareEdge Ratings

CPI-March 2024

CPI inflation, broadly in line with the expectations, has moderated to 4.9% in March from 5.1% in February. Core inflation remained subdued and moderated marginally, consistently staying below the 4% threshold for fourth consecutive months. Although there has been a broad-based moderation in the overall CPI basket, food inflation persists at elevated levels despite marginal deceleration. High food inflation is led by double digit growth in the vegetables, pulses, eggs, and spices.

Contrary to the previous month, food inflation has shown moderation, decreasing to 7.7% from 7.8% in February. The sustained inflationary trend in some non-perishable food categories, such as pulses and spices, raises concerns about the potential broadening of price pressures due to their inherent stickiness. However, it's important to note that supply-side interventions in the form of such as the Open Market Sale Scheme (OMSS) and export restrictions by the government, have played a pivotal role in easing food inflation. The outlook of food inflation has also improved with increased overall acreage in rabi sowing compared to the previous year and expectations of a normal monsoon with a waning El Nino condition. The arrival of the rabi harvest in the market is expected to contribute to the cooling of food inflation.

Looking ahead, a favourable base effect is expected to persist until July 2024, helping absorb potential upward risks to price pressures to a certain extent. Continued government interventions on the supply side and recent reductions in LPG and fuel prices are expected to mitigate any potential upward price pressures. However, it's crucial to note that external risks to the inflationary outlook have intensified. Brent crude prices have surged, surpassing USD 90 per barrel for the first time since October 2023, and industrial metal prices have seen an uptick of above 14% since early February. The recent increase in global commodity prices also demands close monitoring. Prolonged production cuts by OPEC countries, trade disruptions due to geopolitical tensions, and increased demand from major consumers like the US and China have contributed to the rise in commodity prices. These elevated commodity prices have the potential to percolate into the domestic consumption basket, particularly at a time when both rural and urban demand are experiencing a recovery, thereby aiding higher passthrough.

For FY25, we expect inflation to average 4.8%, with Q1FY25 at 5.0%. Given that the RBI Governor has been highlighting the aim of getting inflation to 4% on a durable basis, the policy rates are likely to be kept on hold with no change in stance. We anticipate that the MPC will contemplate rate cuts in the third quarter of FY25.

IIP-February 2024

As expected, the growth in industrial output increased to a four-month high of 5.7% in February. This was supported by a broad-based acceleration in growth across the mining, manufacturing, and electricity sectors with the base-effect at play.

The consumer goods segment continued to show a mixed picture. While consumer durables output increased by 12.3% aided by a favourable base, output of consumer non-durables fell by 3.8% staying in the contractionary zone for the second month in a row. However, rural demand has been showing some signs of improvement as seen in the sale of two-wheelers and FMCG volume growth in rural areas. Thus, we could see some improvement in the performance of consumer goods segment in the coming months. Furthermore, the moderating price pressures and prospects of a normal monsoon remain positives for the consumption scenario going ahead.

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