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CPI inflation may have hit 9-month low of 6.4% in November, October IIP down 0.4%

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India’s headline retail inflation likely dropped to a nine-month low of 6.4 percent in November, according to a Moneycontrol poll of 19 economists.

While Consumer Price Index (CPI) inflation dropped sharply in October to 6.77 percent thanks to favourable base effect, the decline in inflation in November is expected to be smaller, but driven by both, a favourable base as well as moderating prices.

The Ministry of Statistics and Programme Implementation will release retail inflation data for October at 5.30 pm on December 12.

At 6.4 percent, economists’ prediction for last month’s inflation print would be the lowest since February. However, it would be the 11th consecutive month of 6 percent-plus inflation and the 38th month in a row it has been higher than the Reserve Bank of India’s (RBI) medium-term target of 4 percent.

Inflation dynamics

According to Rahul Bajoria, Chief India Economist for Barclays, food inflation likely fell to 6.2 percent in November from 7 percent in October.

“We continue to see some small price increases in cereals and pulses, but a loss of momentum in perishables such as vegetables is likely,” Bajoria said in a note on December 5.

Bank of Baroda 6%
Sunidhi Securities 6.04%
QuantEco Research 6.1%
ICRA 6.2%
IDFC First Bank 6.2%
ING 6.2%
Motilal Oswal Financial Services 6.2%
YES Bank 6.24%
HDFC Bank 6.26%
Standard Chartered Bank 6.35%
IndusInd Bank 6.36%
Barclays 6.4%
Emkay Global Financial Services 6.4%
State Bank of India 6.42%
Deutsche Bank 6.5%
Societe Generale 6.5%
CareEdge 6.6%
L&T Financial Services 7.02%

However, not everyone is convinced food inflation fell in November. According to Rupa Rege Nitsure, Group Chief Economist at L&T Financial Services, CPI inflation may have risen to 7.02 percent due to higher prices of some food items.

Of the 22 food items for which the Department of Consumer Affairs compiles data, 17 saw a month-on-month increase in prices in November – up from 15 in October – including an 11 percent increase in onion prices.

The five food items the prices of which were lower in November compared to October, as per Consumer Affairs Department data, were rice (down 0.3 percent), palm oil (down 0.6 percent), tea (down 0.7 percent), vanaspati oil (down 0.8 percent), and tomato (down 17 percent).

“Moreover, cost-push pressures have increased the prices of many consumer goods and services,” Nitsure added.

If the movement in food prices was mixed, the favourable base effect is also not expected to be as strong as it was in October.

In October 2021, the general index of CPI had increased by 1.4 percent month-on-month, creating a hugely favourable base effect for October 2022 of 140 basis points, RBI staff wrote in the monthly State of the Economy article las month.

In November 2021, the sequential increase in the index was half that of the previous month at 0.7 percent, only slightly higher than the average month-on-month increase of 0.6 percent seen in the index over the last few months. This suggests the base effect was not as favourable last month.

Policy impact

The inflation data for November will come in just days after the RBI’s Monetary Policy Committee (MPC) increased the repo rate by 35 basis points (bps) to 6.25 percent on December 7 – the fifth time it has raised the policy rate in eight months.

As per the RBI’s latest forecasts, CPI inflation is seen averaging 6.6 percent in October-December before cooling to 5.9 percent in January-March 2023 and 5 percent in April-June 2023.

Economists are largely of the view that the MPC may increase the repo rate only once more in February – if at all – before pausing and taking stock of its actions.

“With two out of six MPC members expected to abstain from voting on rate hikes in the next policy review in February, we now expect the RBI to opt for a 25-basis-point increase in repo rate, followed by a pause thereafter,” QuantEco Research said in a note on December 7.

The MPC is scheduled to next meet on February 6-8.

IIP growth

The statistics ministry will also release the Index of Industrial Production (IIP) data for October on December 12, which is expected to show that industrial output contraced by 0.4 percent after growing by 3.1 percent in September.

Data released on November 30 showed India’s core sector growth slowed to a 20-month low of 0.1 percent in October, with the overall index of the core industries staying unchanged from the previous month at 138.0.

Given that core industries account for around 40 percent of the IIP, the former’s performance is seen as a lead indicator of the latter. In fact, more than half of the 16 economists polled expect industrial production to have contracted in October on a year-on-year basis.

IDFC First Bank -2%
YES Bank -1.9%
Sunidhi Securities -1.4%
ICRA -1.3%
QuantEco Research -1.0%
Standard Chartered Bank -1.0%
CRISIL -1.0%
Deutsche Bank -0.5%
ING -0.2%
L&T Financial Services 0.3%
CareEdge 0.4%
IndusInd Bank 0.4%
Bank of Baroda 0.5%
HDFC Bank 0.6%
State Bank of India 1.3%
Motilal Oswal Financial Services 4.2%

Other indicators which point towards a poor industrial performance in October include merchandise exports, which contracted by 17 percent to $29.78 billion. This was the first time since February 2021 that monthly exports had fallen on a year-on-year basis to come in below $30 billion.

“While we see the likely decline in October as temporary, IIP growth is likely to stay in low single digits on base effect and the impact of a global growth slowdown on domestic activity, along with weak rural demand, in the coming months,” noted Kanika Pasricha, Economist at Standard Chartered Bank, who expects industrial production to have shrunk by 1 percent.

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