The Index of Industrial Production (IIP) shrank 4% in the festive month of October, indicating the impact of spillovers from a slowing global economy, compared with an expansion of 3.5% in September.
“While IIP growth was expected to slow in October, due to the base effect, the sharp contraction comes as a shock,” said Rajani Sinha, chief economist, CareEdge. “Delving deeper into the data shows a broad slowdown across segments. However, what is specifically worrisome is the continued poor performance of the consumer durables and non-durables segment.”
Inflation based on the Consumer Price Index (CPI) eased to 5.88% in November from 6.77% in October and 4.91% in the year-ago period. “We may expect RBI to continue to increase rates by another 25 bps in February as inflation will be above 6%,” said Madan Sabnavis, chief economist at Bank of Baroda, on retail inflation.
The Reserve Bank of India (RBI) raised interest rates by 35 basis points (bps) to 6.25% on December 7 following three successive 50 bps increases to tame inflation.
Food Inflation
A basis point is 0.01 percentage point. The RBI is mandated to keep inflation at 4% with a tolerance band of two percentage points on either side of that. The central bank sent a report to the government after inflation stayed above 6% for three quarters in a row, as required by the law. The government said on Monday that the communication won’t be made public.
The finance ministry said government steps had helped lower inflation.
“The measures taken by the government to contain food prices helped to bring inflation below the RBI tolerance limit of 6%,” it tweeted. “To soften the prices of cereals, pulses and edible oils, appropriate trade-related measures have been undertaken. The impact of these measures is expected to be felt more significantly in the coming months.”
Food inflation was 4.67% on-year in November as against 7.01% in October. Since a large part of an average Indian household’s budget goes toward this, a fall in food inflation to less than 5% is “good news for the households in general and households at the lower end of income pyramid in particular”, said Sunil Sinha, principal economist, India Ratings and Research.
Inflation in vegetables declined 8.08% on year in November while cereals and products gained 12.96%. Fuel and light inflation came in at 10.62%.
“While the extent of rate hike has reduced, Ind-Ra still expects the central bank to undertake a 25 bps hike in February 2023 monetary policy,” Sinha said.
Moderating food prices, especially for vegetables, and a high base drove inflation lower, amid a sticky core, said Rahul Bajoria, MD and head of EM Asia (ex-China) economics, Barclays, also forecasting a 25 bps rate hike in February.
Manufacturing Slowdown
Data released by the ministry of statistics and programme implementation on Monday showed that India’s industrial activity contracted in October as manufacturing fell. India’s industrial output contracted 4% in October from the year earlier, dragged down by manufacturing, which shrank 5.6%. Mining and electricity grew 2.5% and 1.2%, respectively. Factory output, as measured by IIP, grew 4.2% in October last year.
Overall industrial production growth in the April-October period was 5.3% against 20.5% a year ago.
Export-focussed sectors like textile, apparel, leather products, and pharmaceuticals recorded a sharp contraction in October.
“Going forward, with export demand likely to remain weak, domestic demand revival will have to do the heavy lifting,” Sinha said.
Despite the festive season, the industrial output growth in August and September was tepid given these are the months of inventory build-up in view of the festive season, as per India Ratings and Research.
Capital goods output, an indicator of investment, shrank 2.3% in November while consumer durables production contracted 15.3%, indicating sluggish urban demand. Consumer durables output declined 13.4%.
The RBI Monetary Policy Committee is scheduled to meet next on February 6-8.
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