CPI, IIP 15 April 2024

Bhavesh Sanghvi

April 15, 2024

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.