MUMBAI: Two key data-prints – a positive print on retail inflation and a negative one on index of industrial production (IIP) -- released on Wednesday have further bolstered the case for more rate cuts. While the key price index which has been stubbornly high for long, has come in at a low 4.31% for January down 91 bps from 5.22% in the previous month in a big relief to the common man, as food prices eased. With food inflation dropping 237 bps and industrial production numbers for December came in at low 3.2% from a 5.3% in November 2024, policymakers believe that the economy has lost steam.
Both the numbers augur well for the Reserve Bank, which first time in five years cut the repo rate last Friday by 25 bps to 6.25% saying given the taming inflation time is right for supporting growth. If these trends especially the prices index keeps falling in February and March too, that will certainly lead to more rate cuts next fiscal.
Inflation is likely to settle at same levels in the coming months, with the RBI projecting average in the March quarter at 4.4%, staying at 4.5 percent in June quarter, but further easing to 4 percent in Q2 and 3.8% in the Q3 and averaging the year at 4.2%.
Official data on retail inflation said driven by continuing softening of food (which constitutes as much as 45.9% of the inflation basket) led to the overall decline in inflation. This is the lowest on-year inflation rate after August 2024.
Food inflation fell to 6% in January, dipping below the 8% mark for the first time in four months, as cereals, vegetables and pulses continued their downward march.
Cereal inflation eased to 6.24% from 6.5%, while vegetables inflation drastically fell to 11.4% from 26.6%. Pulses was lower at 2.59% from 3.83%, and eggs were at a 27 month low. However, oil and fruits inflation rose to double digits. Fruits inflation was at a near five-year high of 12.2%, while oil inflation was at a near three year high at 15.6%.
Meanwhile, the government said the latest index of industrial production (IIP) which measures the growth of industrial production fell to 3.2% in December, from 5.2% in November 2024 as output from electricity and mining declined.
The quick IIP estimates stand at 157.2 against 152.3 in December 2023, while growth rates of mining, manufacturing and electricity stood at 2.6, 3 and 6.2%, respectively.
Within the manufacturing sector, 16 of 23 industry groups recorded positive growth in December. In terms of the use-base classification, the trend was mixed, with a sequential improvement in primary, capital and intermediate goods, and a dip in infra/construction goods, and consumer durables and non-durables.
Icra Ratings chief economist Aditi Nayar sees CPI softening to 4% in February. “Looking ahead, the growth-inflation outlook suggests that there is room for another 25 bps rate cut in either the April or the June meetings. The exact timing of the same would depend on the incoming data, global developments, and the rupee movements," she said.
Rajani Sinha, chief economist at Care Ratings said IIP moderation is due to weaker manufacturing growth of 3% partly weighed by an unfavourable base. With this, IIP growth improved to 3.9% in Q3 from a 2.7% growth in Q2.
On inflation she said core inflation continuing to remain subdued, staying below the 4% mark over the past year is good for the overall inflation trajectory but warned that the ongoing rupee depreciation can exert pressure via imported inflation.
Radhika Rao of DBS Bank at 4.3% inflation is edging closer to the mid-point of the target range. The sequential moderation is largely driven by a correction in vegetable prices, reflecting winter disinflation as well as lower protein sources while non-food momentum was subdued, with the core reading (ex-food and fuel) inching up marginally to 3.66%.
Paras Jasrai, a senior economist at India Ratings falling inflation alleviates fears of demand pressure on the economy and inflation in February and March should print in the 3.9-4% range, brightening the prospects of Q4 inflation meeting RBI’s forecast of 4.1%.