Retail inflation hits three-month low at 5%, factory output soars to 14-month high of 10.4%

In double delight for the economy, retail inflation rates moderated to a three-month low of 5 per cent in September while factory output soared to a 14-month high of 10.4 per cent, official data showed on Thursday.

Annual retail inflation, called CPI or consumer price index, rose 5.02 per cent in September from 6.83 per cent in the previous month on the back of softer vegetable prices, according to data released by the National Statistical Office (NSO).

CPI inflation, which still remains above the 4 per cent target set by the central bank, was lower than the latest figure in June this year when it came at 4.81 per cent.

While the sequential moderation was broad-based, the food and beverages, and fuel and light segments witnessed a sizable decline.

Core inflation (CPI excluding food and beverages, fuel and light and petrol and diesel for vehicles) dipped to 4.7 per cent, the lowest since February 2020.

Food inflation, which accounts for nearly half of the overall consumer price basket, subsided to 6.56 per cent in September from 9.94 per cent a month back.

Given the lower acreage and the expected decline in domestic pulses production, prices of pulses are on the rise while cereal inflation continues to be in double digits.

The Reserve Bank of India (RBI) had, earlier this month, kept its key lending rate unchanged for a fourth consecutive policy meeting, and emphatically reiterated that it was targeting to bring inflation down to 4 per cent.

Factory output, measured as the index of industrial production or IIP for August 2023 came in at a 14-month high of 10.4 per cent, with three of the six used-based categories witnessing a double-digit expansion in the month.

The IIP growth compares to a 6 per cent rise in July and a contraction of 0.7 per cent in August 2022.

The previous high was recorded at 12.6 per cent growth in June 2022.

Industrial sector highlights

The growth in the manufacturing sector came in at a 14-month high of 9.3 per cent,  while the mining sector possibly benefitted from the rainfall deficiency that led to double-digit output growth of 12.3 per cent.

Typically, the electricity sector witnessed a decline in generation during the monsoon months, but given the irregular rainfall, the power demand was particularly high from the residential and agricultural segments in August. Electricity generation was up 15.3 per cent.

The stocking requirements during the festive season may have given a boost to consumer goods production - while consumer non-durables ramped up to 9.5 per cent, consumer durables grew by 3.5 per cent.

Cumulatively, IIP has grown by a healthy 6.1 per cent year-on-year in the first five months of the fiscal, which reflects a significant pickup in industrial activity. The festive season is expected to provide an optical boost to the growth of certain categories within the IIP between September and November.

But with the Israel-Hamas conflict raising oil price concerns, economists remained cautiously optimistic about the future.

Commenting on the numbers, Suman Chowdhury, chief economist at Acuite Ratings & Research, said IIP is expected to maintain such a trend for FY24 as a whole, although, the base factor will not remain as favourable in the second half of the year.

"Notwithstanding the favourable headline inflation print, food inflation remains elevated. Moreover, the uneven monsoon, lag in sowing of crucial kharif crops, such as pulses and oilseeds and modest reservoir levels do not augur well for the outlook for food inflation," said Aditi Nayar, chief economist at Icra Ltd.

She said the perceived inflation during the festive period may have a larger impact on sentiment this year compared to 2022 when festivities were prioritised after two years of COVID-19.

"Our projections suggest that the headline CPI inflation will remain volatile in a wide range until June 2024," she said, expecting the RBI to extend the pause in interest rate until the beginning of a shallow rate cut cycle of 50-75 basis points in August 2024.