 "Inflation, economy, market, stagflation")
India’s retail inflation rate in April fell to an 18-month low on the back of a high base and easing price pressures across categories, giving the central bank elbow room to maintain an extended pause on policy rates. Factory output growth, on the other hand, decelerated sharply to a five-month low in March, reflecting concerns about weak consumer demand.
Data released by the National Statistical Office (NSO) on Friday showed that the Consumer Price Index (CPI)-based inflation stood at 4.70 per cent in April, as against 5.66 per cent the previous month.
Due to moderation in the food, fuel, clothing and services prices, the headline inflation rate stayed within the Reserve Bank of India’s (RBI’s) upper tolerance limit for the second consecutive month in 2023. The RBI has an inflation target of 4 per cent, with a margin of 2 percentage points on either side.
Meanwhile, growth in factory output, measured by the Index of Industrial Production (IIP), slowed to 1.1 per cent in March, from 5.8 per cent in February -- largely due to a decline in output growth in manufacturing (0.5 per cent), and a contraction in electricity output (-1.6 per cent). For the full financial year (FY23), IIP growth stood at 5.1 per cent compared to 11.4 per cent in FY22.
Food inflation fell to a 17-month low of 3.84 per cent in April from 4.79 per cent in March.
The fall in food inflation is mainly driven by a deceleration in the prices of cereals (13.67 per cent), egg (3.1 per cent), milk (8.85 per cent) and fruits (2.09 per cent), and a continued contraction in the prices of oils (-12.33 per cent).
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While the prices of pulses and sugar rose 5.28 per cent and 1.93 per cent, respectively, in April, the prices of vegetables and meat & fish contracted 6.5 per cent and 1.23 per cent.
Besides, core inflation, which excludes volatile food and fuel items, also remained below 6 per cent for the second consecutive month in April, as barring education and personal care, the inflation rate for other services like recreation, transportation, household and health services decelerated.
Aditi Nayar, chief economist at ICRA, said the above-average rainfall and lower-than-normal temperatures in April delayed the seasonal rise in prices of perishable items, especially vegetables. “Food inflation is likely to remain subdued in May 2023. With El Nino expected to materialise only in the second half of the monsoon season as per the meteorological department, kharif sowing may not be impacted. However, any subsequent deficiency in monsoon rainfall could affect kharif yields and winter sowing, and thereby food inflation, which poses a risk to the CPI inflation trajectory,” Nayar added.
In factory output, growth in output of primary goods (3.3 per cent), infrastructure goods (5.4 per cent) and intermediate goods (1 per cent) decelerated in March, while growth in capital goods, which represents investment demand in the economy, accelerated (8.1 per cent). Consumer durables (-8.4 per cent) contracted for the fourth consecutive month, and output of consumer non-durables (- 3.1 per cent) shrank for the first time in five months in March, signalling continued weakness in consumer demand.
Only 10 of the 23 manufacturing sectors registered growth in March, while other sectors like textiles (-7.4 per cent), tobacco (-10.2 per cent), apparel (-30.7 per cent), leather products (-7 per cent), wood products (-9.6 per cent) and paper products (-3.5 per cent) contracted in the month.
Madan Sabnavis, chief economist, Bank of Baroda, said that although machinery and auto sectors did well, it’s the consumer goods, especially fast-moving consumer goods (FMCG) that continued to disappoint. “High build-up of inventory in the previous months to meet pent-up demand is one reason why companies were cautious in expansion as the working capital costs have gone up, as the production ramp-up that happens in March did not happen this time,” Sabnavis added.
With inflation remaining well below the tolerance band, experts foresee the RBI to maintain an extended pause.
Suvodeep Rakshit, senior economist, Kotak Institutional Equities, said the RBI is expected to see this print favourably and remain on a pause in the coming policy meeting in June, as it will be factoring in the global growth prospects, central bank actions, and domestic growth prospects.
Echoing similar views, Rajani Sinha, chief economist, CARE ratings, said the RBI is expected to maintain an extended pause in 2023, subject to weather-related disruptions that could be the main threat to food inflation and the overall CPI inflation in FY24.
The RBI’s Monetary Policy Committee last month paused its rate-hike cycle and retained the repo rate at 6.5 per cent. The MPC has cumulatively hiked the rate by 250 basis points since last May, in order to rein in inflation, which had remained above the 6 per cent mark for most part of FY23.
