With retail inflation easing to 5.48% in November and factory output registering a marginal uptick to 3.5% in October, there is expectation that prices will continue to cool in coming months and industrial production will see an uptick.
While the data will give some respite to the Reserve Bank of India and its new Governor Sanjay Malhotra, which has been hearing pitches for a rate cut amidst slowing growth, retail inflation is seen to continue at levels of 5% in December as well. But analysts are of the view that if inflation continues to be on a downward trajectory, a rate cut could be in the offing in February 2025.
As per official data released on Thursday, consumer price index based inflation eased to 5.48% in November from 6.21% in the previous month as food prices eased. Retail inflation in the food and beverages basket declined to 8.2% in November with vegetable inflation at 29.33% in the month.
“The top five items showing highest year on year Inflation at All India level in November 2024 are garlic (85.14), potato (66.65), cauliflower (47.70), cabbage (43.58) and coconut oil (42.13),” said an official release.
Meanwhile, factory output as measured by the Index of Industrial Production also registered an uptick in October at 3.5% compared to 3.1% in September. Manufacturing registered some recovery in the month and expanded at 4.1% while mining and electricity generation grew at a slower rate of 0.9% and 2% respectively, in October.
Madan Sabnavis, chief economist, Bank of Baroda pointed out that November was the third successive month that inflation has crossed 5% and preliminary indications point to inflation being above 5% in December based on food prices witnessed so far.
He, however, said that the future prospects for inflation look to be good with food inflation moving downwards for sure.
Madhavi Arora, chief economist, Emkay Global Financial Services pointed out that the sequential easing in Core CPI inflation continues to depict weaker domestic demand, led by a negative output gap. “We maintain our FY25 forecast at 4.9% with 4Q easing to an average of about 4.75%,” she said. While the agency does not rule out a cut in February 2025, it said it would be more comfortable taking a firm call closer to the policy window, especially with new Monetary Policy Committee in order.
ICRA also estimates the headline CPI inflation to soften further to about 5.1% in December 2024 from 5.5% in November 2024, amid a dip in the food and beverages inflation print between these months, supported by a favourable base as well as the fresh arrivals of crops in December 2024.
“In our view, if the headline CPI inflation eases to 5.0% or lower by December 2024, the likelihood of a rate cut by the MPC in its February 2025 meeting would be very high. We maintain our baseline expectation of two rate cuts of 25 basis points each in the awaited rate cutting cycle,” said Aditi Nayar, Chief Economist and Head – Research & Outreach, ICRA.
ICRA also anticipates the year on year IIP growth to accelerate to 5% to 7% in November 2024. “However, with the shift in the festive season clouding the YoY growth rates, we believe that looking at the average growth performance for October-November 2024 would provide a more meaningful assessment of activity during this period,” Nayar said.
