New Delhi: Hopes of a December rate cut died on Tuesday as retail inflation shot to a 14-month high, even as the economy consoled itself with a sequential recovery in industrial production.
Retail inflation based on the consumer price index (CPI) hit 6.21% in October, statistics ministry data showed, days after Reserve Bank of India governor Shaktikanta Das cautioned that the month’s reading could be “very high”. This is the highest since 6.83% in August 2023, and compares to 5.49% in September.
Meanwhile, factory output as measured by the index of industrial production (IIP) rose 3.1% year-on-year (y-o-y) in September, fuelled by growth in manufacturing, the statistics ministry data showed. While that is a rebound from the 0.1% contraction seen in August, it is still lower than the industrial output reported during nine of the past 12 months.
The rise in inflation, driven by surging food prices, also breached the RBI’s medium-term target of 2-6% for the first time in over a year. The inflation numbers have dashed any expectations of a repo rate cut when the central bank’s monetary policy committee (MPC) meets early next month.
Economists expect the cut will likely get pushed to the first quarter of 2025. RBI has not cut the repo rate since February 2023. But at the same time, they also expect inflation to cool in the coming months following an expected fall in food prices.
“The (inflation) numbers for the last two months remaining above the RBI’s target level of 4% has further receded the rate cut expectations in the next month,” said Sujan Hajra, chief economist & executive director, Anand Rathi Shares and Stock Brokers. “This is consistent with our view that the rate cuts will begin only at the beginning of 2025.”
Other economists concurred. Upasna Bhardwaj, chief economist of Kotak Mahindra Bank, said, expects “a cautious easing from February”, while Dharmakirti Joshi, chief economist of Crisil, expects the MPC to cut rates only towards the end of this fiscal.
To be sure, government bond yields stayed stable despite the high inflation numbers. The India 10-year bond (G-Sec) yield closed at 6.829% on Tuesday, marginally up from 6.823% on Monday, according to data from Bloomberg.
Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm, said this underscores the resilience of the government bond market. “With abundant system liquidity and strong domestic investor demand, the bond market is expected to stay steady, with only minor volatility,” he added.
The economists are optimistic about inflation cooling in the coming months. According to Hajra, the good monsoon seen this year and a better rabi harvest would result in lower food price volatility in the next quarter.
While pointing out that the sharply high CPI inflation has largely been led by a surge in vegetable prices and a sharp pickup in core inflation, Bhardwaj said, “We expect the uptick in food prices to keep the headline inflation higher than 5% even in the next reading before the seasonal downturn begins to bring down inflation.”
“In our base case, we expect food inflation to ease this fiscal as kharif sowing has been healthy. Vegetable prices can correct sharply when fresh stocks enter the market. Accordingly, we expect the MPC to cut rates towards the end of this fiscal,” said Joshi of Crisil.
The inflation numbers are higher than estimates as well. A Reuters poll of 45 economists had estimated retail inflation at 5.81% in October. Rising food prices have reduced the purchasing power of lower-income households, affecting festive season sales this year, the news agency said.
A Mint poll of 18 economists, too, had projected inflation to be at 5.95% for October.
The reported numbers also were significantly above RBI’s quarterly estimates. During its October monetary policy announcement, the RBI maintained its 4.5% inflation projection for FY25, with Q3 inflation projected at 4.8%. The higher-than-expected print in October may well push inflation beyond that forecast for the October-December quarter.
A back-of-the-envelope calculation suggests inflation would have to average 4.1% in November and December to align with RBI’s forecast. According to Aditi Nayar, chief economist and head of research and outreach at Icra, inflation is expected to exceed the MPC's estimate for the third quarter by at least 60-70 basis points.
Food inflation, a persistent challenge, rose to 10.87% in October from 9.24% in September. This, too, was the highest in 15 months. To be sure, food inflation accounts for nearly half of the consumption basket.
Meanwhile, core inflation, which excludes food and fuel prices, stood at 4% in October, up from 3.8% the previous month, according to Icra’s Nayar. Icra’s calculates core inflation by excluding inflation related to food and beverages, fuel and light, and petrol and diesel for vehicles.
Food prices have remained elevated for over a year and stayed above 7% from November 2023 to June 2024, primarily due to last year’s uneven and below-normal monsoon rains. While food inflation slowed in July, it rose in August, September and October.
Prices of cereals, meat and fish, oil, fruits, vegetables, prepared meals, snacks, and sweets rose during October, while prices of eggs, milk and milk products, and pulses fell compared to the previous month.
“While the fading of the favourable base factor has contributed to the surge, continuing high prices of vegetables have been a key factor in the high figure,” said Suman Chowdhury, executive director & chief economist at Acuite Ratings, adding that vegetable inflation, particularly tomatoes, played a major role.
“Tomato prices have soared due to heavy rains in the September-October period, damaging crops in key producing states like Karnataka, and Andhra Pradesh,” he added.
Earlier in October, the Reserve Bank of India (RBI) left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take a while. Pertinently, the repo rate has not changed in 10 meetings of the RBI’s MPC since February 2023.
It last raised the repo rate to 6.5% in February 2023. Regulating interest rates is a key for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and consumers, which can, in turn, bring down consumer spending and inflation.
The central bank expects India's GDP growth for FY25 at 7.2% and CPI inflation at 4.5% for the ongoing fiscal year. RBI’s medium-term target for CPI inflation is 4% within a band of plus or minus 2%.
Industrial sector activity, meanwhile, is chugging along.
"The IIP expanded by 3.1% on a y-o-y basis in September 2024 after declining by 0.1% in August 2024, amid a favourable base,” said Nayar of Icra. She noted that the uptick was broad-based with all the use-based segments witnessing an improvement in growth in September 2024 vis-à-vis August 2024.
“Balancing between the positive impact of the early onset of the festive season and an unfavourable base (+11.9% in October 2023), Icra anticipates the y-o-y IIP growth to print at about 3-4% in October 2024,” she added.
During September, manufacturing output grew by 3.9%, while mining and electricity output reported annual growth of 0.2% and 0.5%, compared to 1.1%, -4.3% and -3.7%, respectively, in August.
During the month, the output of primary goods rose by 1.8%, and capital goods by 2.8%, while the output of intermediate goods and infrastructure/ construction goods rose by 4.2% and 3.3%, respectively.
In August, the output of primary goods fell -2.6%, while capital goods rose 0.5%, and the output of intermediate goods and infrastructure/ construction goods rose by 3% and 2.2%, respectively.
The output of consumer durables and consumer non-durables rose by 6.5% and 2%, annually, during September, against 5.3% and -4.5 % growth reported in the previous month.
Paras Jasrai, senior economic analyst at India Ratings & Research - A Fitch Group Company, pointed out that overall, IIP growth in 2QFY25 stood at a seven-quarter low of 2.6% y-o-y due to the combination of high base effect (2QFY24: 7.8% y-o-y) and weather vagaries.
“Going forward, an unfavourable base effect (October 2023: 11.9% y-o-y) is likely to dent the industrial activity in October 2024. However, there has been a sustained pick-up in various high-frequency indicators owing to the festive rush, which would provide some support to the industrial output,” Jasrai said.
He added that while the annual growth of e-way bill and coal production has remained steady at 16.9% and 7.5% (four-month high) in October 2024, other indicators such as electricity demand and petroleum consumption have improved to a three-month high during October.
Payal Bhattacharya contributed to this story.
