Inflation rises to 7.4% in Sept, factory output declines in August

This compounds the problem for the Reserve Bank of India, which has to rein in inflation while not stymieing growth. Several agencies including the World Bank and the IMF have already lowered India’s growth forecast below 7 per cent for the current financial year. The RBI, which has hiked policy rates by 190 points in the last five months to 5.90 per cent, is scheduled to meet in December to discuss and decide on rate action.

Retail inflation at 7.41 per cent for September marks the ninth consecutive month (or three quarters) of the headline inflation rate remaining above the upper threshold of the Reserve Bank of India’s target of 4 +/- 2 per cent, and three years of staying above 4 per cent, according to data released by National Statistical Office on Wednesday.

With this, the RBI will now have to write to the government in a letter explaining the reasons for its failure to keep inflation under target, as required under the Monetary Policy Framework Agreement signed between the RBI and the Union Ministry of Finance.

Manufacturing output, which accounts for 77.6 per cent of the weight of the IIP, contracted 0.7 per cent in August, while consumer durables and consumer non-durables – an indicator of fast-moving consumer goods – also contracted 2.5 per cent and 9.9 per cent, respectively, indicating subdued consumption demand.

Capital goods output, however, grew 5 per cent in August, indicating frontloading of capital expenditure by the Union Government which grew 46.81 per cent year-on-year during April-August 2022.

Experts said the industrial recovery continues to be fragile and the decline in August is off the mark given that usually this period sees a pickup in stocking up of inventories ahead of the upcoming festive season. “The negative growth in consumer durable is a bit perplexing as usually around this time the consumer durable manufacturers step up their production to create adequate inventory to meet the upcoming festival season demand. The pattern of growth across used based classification suggests that consumption demand is likely to witness more headwinds in the coming months from high inflation and reversal of interest rate cycle, but the demand for capital/ infrastructure goods may continue to get support from the sustained government capex spending. This reinforces our view that the ongoing industrial recovery not only continues to be fragile but is also not broad based,” Sunil Kumar Sinha, Principal Economist, India Ratings said.

Going ahead, experts said high frequency indicators have improved in September and are likely to support pickup in IIP. “The year-on-year growth of most available high frequency indicators improved in September 2022 relative to August 2022, amidst the onset of the festive season, such as Coal India Limited’s output, vehicle registrations, electricity generation, ports cargo traffic, rail freight traffic and diesel consumption, which is likely to help the IIP return to a positive, albeit modest growth, in the just-concluded month,” Aditi Nayar, Chief Economist, ICRA said.

Food inflation, as measured by combined food price index, rose to 8.60 per cent in September, up from 7.62 per cent in August and 0.68 per cent a year ago. Inflation in rural areas was at 7.56 per cent, higher than urban inflation at 7.27 per cent in September, with food inflation at 8.53 per cent and 8.65 per cent, respectively. Cereals inflation rose to 11.53 per cent in September from 9.57 per cent last month, while vegetables inflation increased to 18.05 per cent from 13.23 per cent. Clothing and footwear inflation rose to double-digit of 10.17 per cent in September from 9.91 per cent a month ago, while fuel and light inflation inched down to 10.39 per cent from 10.78 per cent. Among states, the highest inflation rate in September was recorded by West Bengal (9.44 per cent), Telangana (8.67 per cent) and Madhya Pradesh (8.65 per cent)

Despite a high favourable base effect next month onwards, inflation rate may rise above 6 per cent given the recent excessive rainfall in early October, setting stage for another rate hike by the RBI in December. “CPI inflation rose as expected in September, led by food prices, while October is also tracking just above 6%. The RBI will struggle to pause its hiking cycle if CPI remains out of target, shifting the balance of risks towards another rate hike in December,” Rahul Bajoria, Chief India Economist, Barclays said.

The Monetary Policy Committee is expected to hold a special meeting to discuss and draft the letter to be sent to the government. Last month, RBI Governor Shaktikanta Das had said the central bank considers the communication to the government for missing the inflation targets as privileged communication and will not be making it public.