Inflation relief for first time in 10 months, but IIP dampens mood; RBI in a fix, to hike or not to hike rate?
December 13, 2022
Notably though, the entire positive surprise in CPI was due to food inflation (down to 11-month low of 4.7% YoY), as core inflation inched up to 6.3% YoY from 6.2% last month.
The CPI inflation rate for November fell within the RBI’s threshold, hitting an 11-month low at 5.88%. The fall in the CPI number was led by the drop in food inflation to 4.67%. However, on the other hand, October’s IIP data contracted by 4%, the lowest in 26 months. Will the predicted inflation trajectory lead to RBI’s stance softening? Most analysts are factoring in another rate hike of 25 bps in the February MPC meet.
CPI inflation outlook
“November CPI inflation, much lower than expected, dipped to 5.9%, with food prices momentum softening sharply compared to the last few months. Food inflation softened to 6.2%. However, core inflation remained sticky at slightly above 6%. We continue to see CPI inflation around 6% till February 2023 before dipping sharply to 5% in March and to around 4.5% in 1QFY24,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. The primary reason for the softening inflation numbers is the dip in food and vegetable prices, adds Nish Bhatt, Founder & CEO, Millwood Kane International.
“Notably though, the entire positive surprise in CPI was due to food inflation (down to 11-month low of 4.7% YoY), as core inflation inched up to 6.3% YoY from 6.2% last month. Services inflation was largely intact at 5.5% and the CPI basket with 6%+ inflation increased to 56.2% from 54.7% in the last two months,” stated Nikhil Gupta, Chief Economist, MOFSL.
“The IIP was a disappointment, the industrial output in October contracted despite it being a festive season. The contraction in the consumer durable and non-durables index is a cause of worry,” said Nish Bhatt, adding, “The IIP has also been non-consistent over the past few months. A steady and rising industrial output is key to an overall pick-up in economic growth.”
The decline in IIP is a cause for concern, it indicates poor demand offtake which could translate to slower GDP growth in the upcoming quarters, stated Raghvendra Nath, Managing Director, Ladderup Wealth Management.
Will this affect RBI’s monetary tightening cycle?
Even though the CPI numbers are positive, the focus is on core sticky inflation. “The February policy will be a tough choice between further tightening and a prolonged pause, especially if global and domestic growth impulses start softening. The skew, for now, remains towards a last 25 bps hike followed by a prolonged pause,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. “Since IIP is a key input in quarterly GDP estimates, it imparts downward bias in 3Q GDP growth. At the same time, details of CPI are not so encouraging. Thus, we maintain a 25bp rate hike in Feb ’23 by the RBI,” Nikhil Gupta, Chief Economist, MOFSL added.
[The Financial Express]