Factory output on a surer footing with IIP at four month high in February
Retail inflation remained above 4% for the whole of FY24 with consumer price index based food inflation easing marginally to 4.85% in the month of March 2024 from 5.09% a month ago. Economic activities however, seem to be on a surer footing with factory output as measured by the index of industrial production rising to 5.7% in February this year, which is a four month high.
The official data released on Friday, comes soon after the first bi-monthly monetary policy of the Reserve Bank of India for FY25 on April 5, where it had forecast robust growth prospects with GDP growth estimated at 7% in the current fiscal but had still remained vigilant over inflation and had projected it at 4.5% for the full fiscal and at 4.9% for the first quarter.
“Two years ago, around this time, when CPI inflation had peaked at 7.8% in April 2022, the elephant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” RBI Governor Shaktikanta Das had noted.
The monetary policy committee of the RBI is mandated to target retail inflation at 4% with a variation band of 2% on both sides.
Food inflation continued to remain a sticking point in March with consumer food price index based inflation remaining high at 8.52%, only marginally lower than 8.66% in the previous month. Retail inflation in the food and beverage basket also remained high at 7.68% in March.
Analysts noted that the inflation data is in line with market expectations and is unlikely to be a big moving factor in RBI’s reaction function. “We have been arguing that the RBI has no macro stability merit in preceding the Fed in rate action and with our base case of no cut by Fed in CY2024, it appears difficult to see the RBI cut repo rate either. However easier banking liquidity conditions in coming months would still keep financial conditions easy despite no policy action,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
Aditi Nayar, Chief Economist, Head Research and Outreach, ICRA said the agency estimates the food and beverages inflation to remain above the 7% mark in April 2024. “An intensification of the impending heatwave may worsen the seasonal uptick in prices of perishables, heightening the criticality of a favourable monsoon in 2024 to keep food inflation in check and inflationary expectations well-anchored,” she cautioned, adding that the ongoing uptrend in international crude oil prices could also pose a risk to the CPI inflation outlook in the near term, although the extent of the impact would depend on the pass-through to retail fuel prices.
“Monetary easing is likely to be quite back-ended in 2024, pending clarity on various factors such as the turnout of the monsoon, evolution of crude oil prices as well as rate action from the US Fed. At best, we foresee 50 bps of rate cuts from the MPC, in the second half of the fiscal,” she further said.
Meanwhile, the disaggregated data for IIP was quite mixed, ranging from a contraction of 3.8% in consumer durables and a double-digit expansion of 12.3% in consumer durables in February 2024. Infrastructure and intermediate goods grew at a robust pace of 8.5% and 9.5% year on year in February but capital goods output was muted at 1.2%.
Overall, IIP grew by 5.9% between April and February 2024 and analysts expect it to grow by about 5% in March as well. “Based on the available high frequency data for March 2024, ICRA anticipates the year on year IIP growth to print at ~4.5-5.5% in that month, aided by a low base (+1.9% in March 2023),” Nayar said.
