The unexpected double-digit rise in the Index of Industrial Production (IIP) indicates the economy continues to purr despite elevated interest rates, high inflation and a weakening global economy. “The next two months should ideally see sustained growth if rural demand revives – this has been a lacuna so far,” said Madan Sabnavis, chief economist, Bank of Baroda.
The IMF Tuesday raised India’s growth forecast for FY24 to 6.3% from 6.1% estimated in July citing better-than-expected April-June quarter.
The twin numbers provide comfort to RBI to hold rates at current levels till retail inflation eases to 4% without worrying about hurting growth.
‘No rate cut seen before Q2, 2024′
The Reserve Bank of India‘s monetary policy committee held the policy rate at 6.5% for the fourth consecutive time at its meeting last week.”Further monetary tightening is not warranted in the near term, amid the continued lagged transmission of past rate hikes through the economy,” said Aditi Nayar, chief economist, ICRA.”Inflation is still well above the RBI’s 4% midpoint target and reaching this is unlikely anytime soon. We don’t believe a rate cut is in the cards before Q2, 2024,” said Oxford Economics in a note.
Food inflation cooled to 6.6% in September from 9.9% in the previous month following a sharp correction in vegetable prices, moderation in milk inflation, and continued deflation in edible oils. Core inflation declined further to 4.6%, lowest since March 2020.
However, cereal inflation continued to remain high, registering a double-digit rate at 11%. “Inflation in pulses, cereals, and spices continued to exert pressure, led by the impact of an uneven southwest monsoon, geopolitical turmoil, and global shortages,” said Dipti Deshpande, principal economist, Crisil.
Crude oil could add to inflationary pressure.
“Headline CPI inflation will remain volatile in a wide range until June 2024, with the outlook for food inflation remaining murky and continuing volatility in crude oil prices,” said Nayar.
Sabnavis noted inflation is expected to remain above 5% in the coming months.
Thirteen out of 22 states had higher than 5% inflation in September while three states reported over 6%. Rajasthan and Haryana saw 6.5% retail inflation in September, the highest among all states.
Resilient domestic demand helped industrial output, with all three major categories registering stellar growth in August. Electricity and mining registered double-digit increases of 15.3% and 12.3%, respectively, while manufacturing expanded by 9.3%.
“While the headline was supported by base effect (which added 2.2 percentage points), momentum too was strong as industrial production rose 1.8% month on month, mostly driven by electricity and manufacturing,” said Rahul Bajoria, head, EM (ex-China) Asia Economics, Barclays.
Capital goods output, an indicator of investment, rose 12.6% in August. Consumer durables, an indicator of urban demand, rose 5.7% against a 2.6% contraction in July. Production of consumer non-durables, a proxy for rural demand, accelerated to 9% in August from 7.4% in July.
