Author: Growthfiniti@admin

Key Insights from July CPI and June IIP:

• Headline Inflation: The headline inflation rate dropped below the 4% target, primarily due to a favorable base effect. However, food prices remained a concern, with another significant increase in vegetable prices, as expected. The revision of mobile tariffs also contributed to higher services inflation. Despite the lower overall inflation, driven by the base effect, the RBI’s monetary policy stance is unlikely to be influenced, as inflationary pressures remain elevated.
• CPI Performance: The Consumer Price Index (CPI) eased more than expected to 3.5%, compared to 5.1% last month and 7.4% a year ago. On a sequential basis, inflation rose by 142 basis points (bps) compared to 133 bps last month, largely driven by food inflation, which increased by 247 bps compared to 269 bps last month. This was mainly due to a 14% month-over-month rise in vegetable prices for the second consecutive month.
• Core CPI: Core CPI increased to 3.3% from 3.1% in the previous two months, after a year of consistent decline. The sequential pace of core inflation rose to 56 bps from 11 bps last month.
• Price Increases: Prices rose across most categories except fuel, which saw a slight decline of -0.2%. Housing, clothing, and pan & tobacco prices increased by 0.5%, 0.2%, and 0.2%, respectively.
• Services Inflation: The pace of services inflation accelerated to 0.8% month-over-month, up from 0.3% in the previous two months. The most significant price increase was in transport and communication (1.8%), driven by a mobile tariff hike. Education prices continued to rise by 0.9%, while medical care, personal care, and household requisites saw modest increases of 0.2%-0.3%.
• IIP Growth: Industrial production growth slowed to 4% year-over-year, down from 6% last month and 4% in June 2023. Mining, manufacturing, and electricity sectors registered year-over-year growth of 10%, 3%, and 9%, respectively. Of the 23 industries, 14 saw year-over-year growth, with electrical equipment, computers & electronics, and other transport equipment being the major contributors to the IIP.
• Sectoral Performance: Among use-based segments, consumer durables (9%) led the growth, followed by primary goods (6%), infrastructure goods (4%), intermediate goods (3%), and capital goods (2%). Consumer non-durables contracted by -1%. Sector-wise, 14 out of 23 sectors showed year-over-year growth, with notable increases in electrical equipment (28%), computers & electronics (16%), and other transport equipment (9%). Declines were seen in tobacco products (-11%), pharmaceuticals (-3%), paper products (-2%), textiles (-2%), and beverages (-1%).

Summary:

• CPI: Inflation eased to 3.5% in July, primarily due to a favourable base, but sequentially, it rose by 142 bps. Core CPI also saw an uptick, driven by food and services inflation.
• IIP: Industrial production growth slowed to 4% year-over-year, with mixed performance across sectors.

India maintained its position as the fastest-growing G20 economy, with a real GDP growth of 8.2% in FY24. Although there was a slight deceleration to 7.8% YoY in Q4FY24, the growth from the previous quarter was revised upward to 8.6% YoY. The main driver of this growth over the past two years has been fixed investment spending, which grew by 9% in FY24 but slowed to 6.5% YoY in Q4FY24 due to a pause before the elections. Positive net exports of goods and services, along with restocking, further contributed to real GDP growth.

Buoyed by increased tax revenue, the fiscal deficit decreased to 5.6% of GDP in FY24, surpassing the budgeted estimate of 5.9%. This reduction is expected to encourage more investment in FY25.

With expectations of a La Nina-led above-normal monsoon boosting private consumption and investment spending, as well as an anticipated recovery in exports after the global trade recession, real GDP growth is projected to accelerate to 8.5% in FY25.

Furthermore, income tax revenue experienced significant growth in FY24, surpassing budgetary projections. This, along with growth in Corporate Tax and GST revenue, led to a moderation in both the fiscal deficit and the primary deficit. These lower deficits are expected to exceed the deficit-reduction target in FY25, thereby encouraging more private investment.

Additionally, CPI inflation is expected to decrease to below 4% YoY in Jul-Sep’24, allowing for a 25 basis points rate cut in Aug’24. With the anticipated above-normal monsoon and subsequent moderation in inflation, two rate cuts are expected before the end of FY25. This, combined with an acceleration in private consumption, improvements in net exports, and increased investment, sets the stage for 8.5% real GDP growth in FY25. Services are expected to return to their long-term average growth rate, while manufacturing and construction retain momentum from FY24. Any post-election reforms could further enhance these growth prospects.

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Here are the key points from the April’24 CPI:

• Inflation remained stable and within the RBI’s acceptable range. However, increased prices of fruits and vegetables due to seasonal factors added pressure to the food prices. The RBI has highlighted the importance of monitoring food price inflation closely, although expectations of a normal monsoon in the second half of FY25 may alleviate some concerns. With inflation above 4% and strong economic growth, it is anticipated that the Monetary Policy Committee (MPC) will maintain its pause on interest rates.
• Headline inflation remained steady at 4.9% compared to the previous month and 4.7% from April’23, with a sequential price rise of +48 basis points.
• Core CPI continued its downward trend for the eleventh consecutive month, decreasing to 3.2% from 3.3% in the last month, with a monthly increase of 55 basis points compared to 17 basis points previously.
• Food and beverage prices, particularly fruits, experienced a significant increase, contributing to a 63 basis points rise in food inflation compared to a 21 basis points rise in the previous month.
• Fuel and light prices saw a 1% decrease compared to a cumulative 2.8% deflation over the last two months. Housing prices increased by 1%, while prices for pan/tobacco and clothing rose by 0.4% and 0.2%, respectively.
• Services inflation accelerated to 0.6% compared to a 0.2% rise over the past four months, with the highest increase observed in personal care (0.3%). Transport & communication prices fell by -0.2%.
• The gap between rural and urban CPI narrowed slightly, with rural inflation easing to 5.4% from 5.5% in the previous month, while urban inflation remained stable at 4.1%.

In summary, CPI remained stable at 4.9%, with core CPI easing to 3.2%. Food inflation was driven by increases in fruit and vegetable prices, while services inflation increased, led by personal care. The rural-urban CPI gap narrowed slightly.