Category: CPI & IIP

In August 2024, India’s Consumer Price Index (CPI) inflation slightly increased to 3.65% year-over-year (YoY) from 3.60% YoY the previous month. Food inflation also rose, reaching 5.30% YoY in August 2024, up from 5.06% in the prior month.

Vegetables, with a CPI weight of 6.0%, continued to be the main contributor to inflation, followed by cereals (9.7%) and pulses (2.4%). In August, inflation for these items remained high, with vegetables at 10.7% YoY, cereals at 7.3% YoY, and pulses at 13.6% YoY. Overall, food inflation remained broad-based, with 40% of items in the food basket experiencing inflation rates above 6%.

Core inflation, excluding food and fuel, held steady at 3.44% YoY. However, core inflation and its refined measures, which further exclude valuables and transportation fuels, saw an increase in July due to a revision in mobile tariffs.

As of September 12, the monsoon has recorded 8% above-normal rainfall compared to the long-period average. The spatial distribution of rainfall has improved over the past month, with excess rainfall in Central and Southern India, normal levels in the North, and deficits in East and North-East India.

We expect inflation to average around 4.3-4.5% YoY for FY25. Food prices may continue to introduce volatility into headline inflation. The RBI’s Monetary Policy Committee might consider shifting the policy stance to ‘neutral’ in the October meeting, given the above-normal monsoon is likely to alleviate food inflation pressures.

Key Highlights of Q1FY25 GDP Data:

• GVA Performance: Q1FY25 GVA exceeded expectations by 30bps, reaching 6.8% YoY, though GDP was slightly lower at 6.7%.
• Industrial Growth: Industrial sector growth improved to 7% YoY, with manufacturing showing a 7% increase. Electricity output advanced by 10%, supported by a favorable base, while mining also displayed solid growth at 7%. Agriculture growth was softer at 2%, aligning with expectations.
• Services Sector: Services growth remained robust at 8%, driven by Construction (11%), Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, and Transportation (6%).
• Investment and Consumption: Despite the quarter’s elections, GFCF growth was steady at 7%, and private consumption (PFCE) growth rose to 7%, though government spending was weak.
• Trade: Exports increased by 9% YoY on a favorable base, while imports grew by 4%.
• Nominal GDP: Nominal GDP growth was at 10%, up from 8% a year ago.

Summary of Economic Trends:
Q1FY25 economic growth remained strong, despite a high base. The growth in GVA was driven by the manufacturing and services sectors, especially construction, while GDP was supported by a pick-up in private consumption and investments. Looking ahead, factors like an above-normal monsoon, higher agricultural output, continued private consumption growth, festival demand, and a focus on capital expenditure are expected to sustain economic activity. The GVA/GDP estimates for FY25-26 remain at 7-7.5%.

Detailed Breakdown:

• GVA: Q1FY25 GVA stood at 6.8% (PC/Consensus estimate: 6.5%/6.4%), compared to 6.3% in the previous quarter and 8% in Q1FY24.
• Industrial Sector: Industrial growth accelerated to 7%, up from 5% in Q1FY24, with manufacturing also growing by 7% compared to last year’s 5%. Electricity and utilities saw a robust 10% increase, compared to 3% the previous year, while mining growth was moderate at 7%.
• Services Sector: Services GVA grew by 8% compared to 10% in Q1FY24, with Construction leading at 11%, followed by Public Administration & Defense (10%), Financing & Real Estate (7%), and Trade, Hotels, Transport (6%).
• Agriculture: Agriculture GVA growth softened to 2%, compared to 4% the previous year.

GDP Performance:

• GDP Growth: Q1FY25 GDP grew by 6.7% YoY (PC/Consensus estimate: 7%/6.8%), compared to 7.8% in the previous quarter and 8% in Q1FY24.
• Investments: GFCF growth was resilient at 7.5%, slightly down from 8.5% last year, despite the general elections.
• Private Consumption: Private consumption (PFCE) grew by 7%, up from 6% in the same period last year, though there was a sequential dip of -2%, a much slower decline compared to the same period in the previous two years.
• Government Expenditure: Government spending remained similar to Q1FY24 levels.
• Trade: Exports increased by 9% YoY, benefiting from a favorable base, while imports grew by 4%. Sequentially, imports rose by 11% QoQ, while exports fell by -14%.

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.

I

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.

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.