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Business News/ Economy / Retail inflation and factory output deliver twin thrust to Indian economy

Retail inflation and factory output deliver twin thrust to Indian economy

Retail inflation was at a 10-month low in March, and industrial output was at a four-month high in February

Retail inflation figures for March 2024Premium
Retail inflation figures for March 2024

New Delhi: The Indian economy showed signs of buoyancy towards the end of the fiscal year 2023-24, as industrial output rose to a four-month high and retail inflation fell to a 10-month low, data released on Friday showed.

Industrial output grew 5.7% in February, up from 4.14% in January and 4.3% in December, after falling to an eight-month low of 2.5% in November. On the other hand, consumer price index (CPI)-based retail inflation fell to 4.85% in March, the statistics ministry said, the first month after November 2023 that it has gone below 5%.

A Mint poll of 14 economists had estimated retail inflation to fall to 4.9% in March, due to a decline in food and fuel prices, and a continued easing in core inflation.

In the April-February (FY24) period, factory output expanded 5.9%, a notch above the 5.6% expansion reported during the year-ago period. March inflation fell from 5.09% in February and 5.1% in January, aided by a slower rise in prices of food items like eggs, milk and milk products, fruits, pulses and spices.

CPI inflation remains above the central bank’s target of 4%, but has stayed within its tolerance range of 2-6% for the seventh consecutive month.

Overall, food inflation fell to 8.52% in March, down from 8.66% in February, when it had seen a sharp rise in prices of meat, fish and eggs, and vegetables.

Food inflation, measured by the consumer food price index, accounts for nearly half of the overall consumer price basket. It stood at 8.3% in January, and 9.53% in December.

“The headline inflation for March has come in line with expectations," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank. “While core inflation continues to moderate, we remain wary of the heatwaves going ahead, which could keep food inflation elevated and volatile in the summer months."

Bhardwaj added that the MPC is expected to remain on a wait-and-watch mode until H1FY25, with possible easing likely towards the latter part of FY25, “depending on the evolution of monsoons, crude oil prices and timing of Fed’s rate easing cycle".

Last week, the Reserve Bank India (RBI) left the policy rate/repo rate unchanged at 6.5%, signalling that interest rate cuts may take some more time.

Regulating interest rates is a key instrument for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, which can reduce demand among banks, other financial institutions and even the general public to borrow money. Reducing the supply of money in the market can also bring down consumer spending.

Earlier during FY24, high inflation levels, especially food inflation, had prompted the government to take supply-side measures such as releasing substantial cereal stocks from reserves while proactively managing the imports and exports of pulses to ensure supplies. The government had also restricted exports of rice and sugar to tame inflation.

On the back of retail inflation and food inflation being on expected lines, and low state loan auctions, the 10-year yield, which touched 7.18%, is expected to go back towards 7.15% levels on Monday, said Murthy Nagarajan, head-fixed income at Tata Asset Management.

The 10-year yield is used as a proxy for mortgage rates and is also seen as a sign of investor sentiment about the economy.

Meanwhile, factory output measured in terms of the Index of Industrial Production (IIP) rose by 5.7% in February 2024, against 6% in February 2023.

Madan Sabnavis, chief economist at the Bank of Baroda, said that although the latest IIP growth is impressive, it is not broad-based, as it is more of the infra-based industries that have done well. “Consumer goods segment is still yet to recover. But positive growth in electronics is encouraging," he added.

Output in manufacturing rose 5% annually, mining 8%, and electricity, 7.5%. Capital goods production, a proxy for fixed investments, rose 1.2% annually in February. Alongside, consumer durables production, which highlights consumer sentiment, also rose 12.3% annually during the month.

In February, the monthly industrial output growth was the fastest since October.

Industrial output growth rate, which was at 4.61% in April 2023, maintained its momentum and staged 10.9% and 11.9% growth, respectively, in August and October, driven by mining output growth, festive demand for manufactured items and electricity generation, before reporting the lowest growth of the year in November (2.5%).

India's industrial growth has recovered since then.

During the October-December 2023 quarter, the Indian economy soared ahead with a surprise growth of 8.4%, belying fears of a slowdown as manufacturing, electricity and construction continued to fire on all cylinders.

The high growth in the third quarter has also meant a revision by India's National Statistical Office in the GDP growth estimate for FY24 to 7.6% in its recently released second revised estimate, from the 7.3% it had estimated in the first advance forecast.

The RBI's economic growth estimate for FY24 is 7%, while the International Monetary Fund has pegged GDP growth for FY24 at 6.7%.

Meanwhile, during March, inflation in vegetables and pulses stood at 28.34% and 17.71%, respectively, lower than the 30.25% and 18.90% recorded during February.

Among states, Delhi and Uttarakhand reported the slowest retail inflation at 2.29% and 3.58%, respectively, during March, while Odisha (7.05%), and Assam (6.08%) recorded the fastest price rice.

However, 13 of the 22 states witnessed higher than average inflation, indicating retail inflation is still considerably high in several large states like Haryana, Madhya Pradesh, Telangana and Bihar.

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Rhik Kundu
Rhik writes about the Indian economy and its crucial indicators. He is constantly navigating corporates, decoding policies, and dabbling with everything in between.
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Published: 12 Apr 2024, 06:24 PM IST
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