India’s retail inflation eased to 6.83% in August from 7.44% in the previous month due to falling food prices, especially vegetables.
“The trend is anticipated to continue as vegetable prices correct. Core inflation is also on a downward trajectory, reflecting the impact of previous rate hikes,” said analysts from JM Financial.
Even as the inflation for August came down it was still above the central bank’s 2%-6% target band.
“The cooldown in headline inflation is mainly on account of lower food prices, which we can
clearly it is cooling down. And we expect the food prices to go down considerably from next
month, as vegetable prices have seen sizable corrections in the previous month,” said analysts from Centrum.
Food prices have been a key concern for policymakers since last year as erratic weather conditions have hurt the output of vegetables, milk and cereals.
“Core inflation (excluding food and beverages, fuel and light and petrol and diesel) eased marginally to 5.06 per cent in August from 5.12 per cent in the previous month, the third consecutive month of decline,” noted analysts from Motilal Oswal.
Food price decline
The significant decrease in food prices was driven by several factors. However, it’s important to note that during this period, certain essential items such as cereals, pulses, milk, and fruits experienced slight price increases.
The erratic weather conditions across the country have sent food prices on a roller-coaster ride, which play a significant role in calculating inflation. Staples like tomatoes and onions notably experienced substantial price spikes, contributing to the overall rise in retail inflation.
In its efforts to rein in domestic inflation, India’s government banned exports of non-basmati white rice last month and imposed a 20% duty on exports of parboiled rice, while imposing a 40% tax on onion exports. It has banned exports of wheat since last year.
Fortunately, the situation has significantly improved, and experts predict a gradual decline in inflation over the coming months. This development carries significant weight, not just for millions of households but also for numerous businesses struggling with reduced demand due to rising inflation.
Moreover, the August dip in inflation is expected to inject some optimism in domestic markets on Wednesday. Investors had been cautiously awaiting this data, leading to increased volatility during today’s trading session.
However, as these weather conditions began to stabilize, vegetable prices corrected themselves, resulting in a YoY slowdown from 37.39% growth in July to 26.13% in August.
Additionally, while cereals and spices remained elevated at 11.85% and 23.19.18% respectively, the overall food price surge subsided, contributing to the easing of inflation.
Food and beverages, which accounts for 45.86 per cent of the overall consumer price index (CPI), recorded an inflation rate of 9.19 per cent in August as against 10.57 per cent in July.
“However, deficient rains and depleting reservoir levels may negatively impact Kharif yields and Rabi sowing. Hence we remain cautious of any signs of persisting inflationary pressures in food category,” said analysts from JM Financial.
Reserve Bank’s target challenge
The Reserve Bank of India (RBI) has been targeting an inflation rate of 4%. Governor Shaktikanta Das emphasized this goal in the recent Monetary Policy Committee (MPC) meeting. However, the recent spike in food prices, caused by factors like heatwaves and unexpected rainfall damaging crops, temporarily pushed inflation rates higher, making the 4% target appear distant.
Das, in the same MPC meeting, expressed confidence that prices would soon revert to more normal rates in the coming months, given the improved supply conditions.
Industrial output surge
In contrast to the slowdown in inflation, India’s industrial production exhibited robust growth. In July 2023, industrial output grew at 5.65% YoY, a notable increase from June’s 3.76%. This encouraging trend was driven by buoyant demand across major sectors.
The manufacturing sector, which accounts for 77.63% of the index’s weightage, saw growth of 4.59% YoY in July, compared to 3.14% the previous month. Mining output also increased significantly by 10.68% YoY, up from 7.56% in June.
Consumer durables, after briefly growing in May, remained in the contraction zone for the second consecutive month in July. However, within consumer durables, primary goods showed strong growth, recording 7.59% growth YoY, compared to 5.31% in the previous month. Infrastructure also displayed robust growth of 11.36%.
Consumer non-durables posted healthy numbers in July, with a growth rate of 7.41% compared to just 0.34% in June. These positive figures indicate a significant upturn in India’s industrial activity.
With food prices expected to decrease further in the coming months as vegetable prices continue to correct, there is a positive outlook for cooling inflation. Core prices have also shown a slowdown, suggesting that previous rate hikes are having an impact.
“Despite these developments, the RBI is likely to adopt a wait-and-watch approach, as the rise in food prices is primarily due to supply-side issues rather than monetary policy. As such, further tightening measures in the next MPC meeting are not anticipated,” said Centrum in its report.
The encouraging industrial production figures, coupled with strong domestic demand, indicate that India’s industrial activity is on a positive trajectory, and this trend is expected to continue in the coming months. The Manufacturing PMI and Index of Eight Core Industries have also performed well recently, further supporting this view.
