Easing inflation in the retail sector and rising factory output are giving the economy a breather

With retail inflation falling to 5.48% in November and factory output recording a marginal rise to 3.5% in October, prices are expected to continue to decline in the coming months and industrial production will rise slightly.

While the data will give some relief to the Reserve Bank of India and its new governor Sanjay Malhotra, who has been listening to calls for a rate cut amid slowing growth, retail inflation is expected to remain at 5% levels in December as well. But analysts believe that if inflation continues on a downward path, a rate cut could be imminent in February 2025.

According to official data released on Thursday, inflation based on the CPI fell to 5.48% in November from 6.21% in the previous month as food prices fell. Retail inflation in the food and beverage basket fell to 8.2% in November with vegetable inflation at 29.33% during the month.

An official statement said, “The top five items showing the highest year-on-year inflation rate at the all-India level in November 2024 are garlic (85.14), potatoes (66.65), cauliflower (47.70), cabbage (43.58), and coconut oil (42.13). ). .

Meanwhile, factory output according to the Industrial Production Index also registered a slight increase in October at 3.5% compared to 3.1% in September. Manufacturing recorded some recovery during the month and expanded by 4.1%, while mining and electricity generation grew at a slower rate of 0.9% and 2%, respectively, in October.

Madan Sabnavis, chief economist at Bank of Baroda, noted that November was the third consecutive month in which the inflation rate exceeded 5% and initial indications are that inflation is exceeding 5% in December based on food prices witnessed so far.

However, he said the outlook for inflation looks good with food inflation definitely moving lower.

Madhavi Arora, chief economist at Emkay Global Financial Services, noted that the sequential easing in core CPI inflation continues to depict weak domestic demand, due to the negative output gap. “We are maintaining our FY25 forecast at 4.9% with Q4 declining to average around 4.75%,” she said. While the agency does not rule out a cut in February 2025, it said it would be more comfortable making a firm decision closer to the policy window, especially with the formation of the new Monetary Policy Committee.

ICRA also estimates headline CPI inflation to ease to around 5.1% in December 2024 from 5.5% in November 2024, amid a decline in food and beverage inflation between these months, supported by a favorable base as well as new crop arrivals in December 2024.

“In our view, if headline CPI inflation falls to 5.0% or below by December 2024, the probability of the MPC cutting the policy rate at its February 2025 meeting will be very high,” said Aditi Nayar, Chief Economist and Head of Research and Outreach at ICRA: “We maintain our baseline forecast of 25 basis points of interest rate cuts each in the upcoming rate cutting cycle.”

ICRA also expects year-on-year IIP growth to accelerate to 5% to 7% in November 2024. “However, with the shift in the festive season overshadowing year-on-year growth rates, we believe that given the average growth performance for the period of October to November 2024 will provide a more meaningful assessment of activity during this period, Nayar said.