Author: Growthfiniti@admin

CPI inflation eased to 4.85% YoY in March 2024, mainly due to a further decline in core inflation to 3.25% YoY, with all components of non-food inflation continuing to decrease, many reaching multi-year lows. Vegetable inflation, although slightly lower at 28.3% YoY compared to February’s 30.2% YoY, remained the primary factor driving food and beverage inflation to 7.7% YoY. While food and energy inflation are influenced by supply factors, core CPI reflects the effectiveness of monetary policy. Significant base effects are expected to impact food inflation in the next six months, leading to a moderation below 7% YoY by June 2024 and below 6% YoY by September 2024. With core inflation likely to remain subdued, headline CPI inflation is projected to average 4.7% YoY in Q1FY25 and 3.6% YoY in Q2FY25, potentially allowing for a 25 basis point reduction in the policy repo rate by August 2024, followed by a further cut to 6% by October 2024. However, the possibility of a rate cut at the June 2024 MPC meeting is increasing, contingent upon the pace of moderation in headline CPI inflation in April and May 2024.

Despite its limitations, the Index of Industrial Production (IIP) indicates a stronger industrial recovery in February 2024. However, the IIP fails to fully capture the impact of technological advancements and changes in a rapidly evolving economy like India’s, particularly in sectors such as electronics, pharmaceuticals, and motor vehicles. Nevertheless, after a sluggish period from November 2023 to January 2024, both the manufacturing (+5% YoY) and industrial sector (+5.7% YoY) accelerated in February 2024, with expectations of even stronger growth in the final month of FY24 (March 2024). Manufacturing, as measured by GDP, is anticipated to have grown over 10% YoY in Q4FY24.

Lower interest rates are expected to support an industrial acceleration in FY25. Despite limitations, the IIP shows growth in sectors like base metals, motor vehicles, and infrastructure/construction goods in February 2024 and throughout FY24. Consumer non-durables, however, declined in February 2024 but showed positive growth in the April 2023 to February 2024 period. The robust rabi crop is poised to boost rural demand and consumer non-durable output in the April to June 2024 quarter. With anticipated interest rate reductions in August to October 2024 and the likelihood of the fiscal deficit undershooting official expectations, private investment is expected to increase, particularly in capital goods and consumer durable sectors, driving economic acceleration in FY25.

March witnessed a notable drop in the trade deficit to USD15.6 billion, the lowest in 11 months, primarily due to a decline in imports, particularly in gold. Despite this, exports saw a slight increase. However, the oil deficit increased due to rising imports and falling exports, alongside higher crude prices. On an annual basis, both exports and imports decreased. For the fiscal year FY24, exports amounted to USD436.7 billion, down by 3.2%, while imports stood at USD677.5 billion, a 5.4% decrease, resulting in a goods trade deficit of USD240.8 billion. Gold imports notably rose by 30.1% YoY due to increased prices and volumes, while oil imports declined by 14% YoY.

Core exports experienced positive growth for FY24, with March marking the fifth consecutive month of core deficit reduction. Major export categories, excluding petroleum, witnessed significant growth both on a monthly and yearly basis. However, gold imports plummeted sharply in March due to lower volumes amid record-high gold prices.

In March, the services trade surplus decreased to USD12.7 billion, marking an eight-month low. Both exports and imports declined by approximately 6% MoM, contributing to the surplus decline. Despite a robust performance earlier in the fiscal year, recent months have seen a slowdown in the services surplus, potentially indicating challenges for the sector in FY25.

For Q4FY24, a current account surplus of 0.2% of GDP is anticipated, driven by better-than-expected goods and services exports, particularly in software. FY24E CAD/GDP is projected at 0.8%, with a BoP surplus of USD42 billion, supported by healthy FPI flows. However, risks such as higher commodity prices and geopolitical tensions may impact these forecasts. Looking ahead to FY25, non-IT services are expected to maintain positive momentum, while goods and IT exports may face slower growth amid weakening global demand. With Brent projected at USD85/bl, FY25E CAD/GDP is expected to remain comfortable at 1.1-1.2% of GDP.

Key highlights from the February Consumer Price Index (CPI) and January Index of Industrial Production (IIP) are as follows:

• The CPI held steady at 5.1% in February, indicating a modest sequential price adjustment. The Reserve Bank of India (RBI) is closely monitoring for tangible signs of a slowdown in headline inflation, while the consistent easing in core CPI offers confidence that monetary policy interventions are positively impacting the economy. This suggests a continuation of the current policy stance, potentially leading to a 25-50 basis points rate cut in the latter part of FY25.
• Core CPI declined to 3.4% year-on-year, extending its downward trajectory for the eighth consecutive month. Food prices saw a slight uptick of 11 basis points on a monthly basis after significant corrections in the preceding two months, while fuel prices decreased by 11 basis points. Housing, clothing, and pan/tobacco prices witnessed moderate increases.
• Services CPI remained unchanged at 0.2% on a monthly basis, with notable price increases observed in medical care and household essentials. Other categories also experienced modest upticks.
• IIP growth registered at 3.8% year-on-year, demonstrating robust expansion considering the elevated base. Mining, manufacturing, and electricity sectors posted growth rates of 6%, 3%, and 6% respectively. Notably, consumer non-durables, intermediate goods, and infrastructure goods emerged as top-performing segments.
• Across sectors, 14 out of 23 industries progressed year-on-year. Growth was particularly strong in segments such as other transport equipment, fabricated metals, motor vehicles, beverages, basic metals, machinery, textiles, and electrical equipment. However, production declined in sectors like computer & electronics, tobacco products, paper products, chemicals, and food products.

In summary, the data reflects a stable CPI with gradual price adjustments and healthy IIP growth supported by various sectors despite certain segments experiencing production declines.

Key Insights from the January 2024 CPI and December 2023 IIP:

• CPI moderated with a second consecutive month of decline in food inflation, particularly in vegetable prices. While the sustained reduction in core price pressures is encouraging, the RBI reiterated its commitment to maintaining monetary policy until the 4% CPI target is consistently met. Consequently, we anticipate the RBI to maintain a prolonged pause on interest rates and policy stance, as outlined in our post-MPC analysis. IIP growth showed resilience despite a high base effect.
• CPI decreased to 5.1% in January from 5.7% in the previous month and 6.5% a year ago. Sequentially, inflation declined by -11bps compared to a -32bps decrease in the previous month. Core CPI, at 3.5% year-on-year, continued its downward trajectory for the seventh consecutive month, rising by +31bps month-on-month compared to +2bps in the preceding month.
• The decline in vegetable prices (-5% month-on-month) contributed to a reduction of -58bps in headline food inflation, compared to a -73bps contraction in the previous month. Housing and fuel & light prices increased by 0.4% each, while clothing and pan/tobacco prices rose by 0.2% and 0.1% respectively.
• Services CPI remained stable at 0.2% month-on-month, consistent with the previous month. The highest price hikes were observed in medical care (0.4%) and personal care (0.3%), with other categories experiencing increases of 0.1% to 0.2%.
• IIP growth improved to 4% year-on-year, up from 2% in the previous month and down from 5% in December 2022.
• Mining, manufacturing, and electricity sectors recorded growth of 5%, 4%, and 1% year-on-year respectively, with 12 out of 23 industries advancing year-on-year. Notable contributors to IIP growth included other transport equipment, motor vehicles, fabricated metals, and basic metals.
• Consumer durables, primary goods, and infrastructure emerged as the top-performing segments.
• CPI at 3-month low: January’s CPI eased to 5.1%, lower than the PC/Consensus estimates of 5.3%/5%, down from 5.7% in the previous month and 6.5% a year ago. Core CPI decreased to 3.5% year-on-year from 3.8% in the previous month, with a month-on-month increase of 31bps compared to a rise of 2bps in the previous month. Food inflation decreased by -58bps month-on-month, driven by declines in vegetable (-4%) and fruit prices (-2%). Housing and fuel & light prices increased by 0.4% each, while clothing and pan/tobacco prices rose by 0.2% and 0.1% respectively. Services inflation remained stable at 0.2%, with the highest price increases observed in medical care (0.4%), personal care (0.3%), household requisites (0.2%), recreation (0.2%), education (0.2%), and transport & communication (0.1%).
• IIP growth accelerated: December’s IIP witnessed 3.8% year-on-year growth, surpassing the PC/Consensus estimates of 3.5%/2.5%, up from 2% in the previous month and 5% a year ago. Sequentially, IIP recorded a 7% improvement compared to a -2% decline in the previous month. Mining, manufacturing, and electricity sectors registered 5%, 4%, and 1% year-on-year growth respectively, compared to 10%, 4%, and 10% growth in December 2022. Among the use-based segments, all segments exhibited stronger year-on-year growth, with consumer durables (5%) leading the way, followed by primary goods (4.6%) and infrastructure goods (4%). Sequentially, consumer non-durables continued their growth trend from the previous month, while other sectors rebounded from the contraction observed in the previous month. Sector-wise, 12 out of 23 sectors recorded year-on-year growth, with notable advancements in other transport equipment (29%), motor vehicles (9%), fabricated metals (9%), and basic metals (7%). However, production declined in tobacco products (-9%), paper products (-6%), and computer & electronics (-5%), while chemicals and machinery production remained stable.