India's retail inflation declines to 6.83% in August from 15 month high peak in July: Industrial production index rises to five month high in July 2023

By: Yash Gupte

India's industrial output increased by 4.8 percent year over year for the first four months of this fiscal, down from an increase of 10 percent from April to July 2022.

As vegetable prices somewhat dropped from the previous month, India's retail inflation fell to 6.83 percent in August 2023 from 7.44 percent in July 2023, according to the data released on Tuesday by the National Statistical Office (NSO), Ministry of Statistics and Programme Implementation (MoSPI). The Consumer Price Index (CPI) inflation reading for August, 6.83 percent, is 61 basis points lower than the 15-month high of 7.44 percent for July. Despite slowing down, it remained outside the Reserve Bank of India's (RBI) tolerance range. The retail inflation rate, or CPI, has already exceeded the RBI's 2–6 percent upper limit four times in 2023 and seven times overall since July 2022. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services.

Talking about the urban inflation in the month of August, it fell to 6.59 percent from 7.20 percent in July 2023. The inflation in rural areas did not decline much in August as compared to July. The rural inflation slightly dropped to 7.02 percent in August 2023 from 7.63 percent in the month of July.

The MoSPI also released the Index of Industrial Production for the month of July 2023. The IIP in July increased to 5.7 percent at five moth high. For the month of July 2023, the mining, manufacturing, and electricity sectors' respective Indices of Industrial Production are 111.9, 141.2, and 204.0.  Industrial growth was first estimated at 3.7% in June but was then corrected to 3.8 percent. In July 2022, it was 2.2 percent. India's industrial output increased by 4.8 percent year over year for the first four months of this fiscal, down from an increase of 10 percent from April to July 2022.

Aditi Nayar, Chief Economist at ratings firm ICRA said, “The IIP print for July 2023, at 5.7 percent, exceeded our expectations, on account of a better-than-expected performance of the manufacturing sector. The YoY performance of most available high frequency indicators improved in August 2023 relative to July 2023, including freight and electricity generation. Based on these trends as well as a favourable base (-0.7 percent in August 2022), ICRA expects the YoY IIP growth to witness an uptick to ~5-7 percent in August 2023.”

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. March has been the first month in the calendar year 2023 which has witnessed the CPI falling below the 6 percent mark. The inflation rate had last exceeded the 7 percent threshold in September 2022 and before that in April 2022 when it was recorded at 7.79 percent. Prior to September 2022 and when it was recorded at 7.79 percent in April 2022, the inflation rate had last exceeded the 7 percent threshold. This is the tenth time since July 2022 that the retail inflation rate has exceeded the upper bound of the 4+/- 2 percent band of the RBI's medium-term inflation target. When determining the benchmark interest rate, the RBI primarily considers the retail inflation rate.

The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was recently increased on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

The Reserve Bank of India has put a hold to its repo rate hike spree. In its second bimonthly monetary policy meeting of FY24, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) made the decision to maintain the repo rate at 6.5 percent. By a vote of 5 to 1, the MPC decided to keep concentrating on the removal of accommodations. The consumer price inflation dropped between March and April 2023 and went into the tolerance band, decreasing from 6.7 percent in 2022–2023, according to RBI Governor Shaktikanta Das, who also announced the policy. Earlier this month, Reserve Bank of India (RBI) Governor Shaktikanta Das stated that although recent increases in vegetable prices are expected to decrease, India's monetary policy council would continue to monitor the state of the country's inflation.

Source: Ministry of Statistics and Programme Implementation

The retail inflation slipped to 6.83 percent in August from a 15 month high of 7.44 percent in July 2023. In August, the Consumer Food Price Index (CFPI) reported inflation of 9.94 percent compared to 11.51 percent in July. Inflation rates for food and beverages, which make up 45.86 percent of the overall consumer price index (CPI), were 9.19 percent in August as compared to 10.57 percent in July. The inflation rate for vegetables (weight: 6.04 percent) dropped to 26.14 percent from 37.34 percent in July. Prices of vegetables like onions, peas, brinjal, garlic, tomatoes, and ginger have more than doubled in the last 2-3 months.

The government of India banned the export of non-basmati white rice last month, levied a 20 percent charge on the export of parboiled rice, and levied an additional 40% tax on the export of onions as part of its efforts to control native inflation. Since last year, it has prohibited the export of wheat. India has reduced the cost of cooking gas cylinders sold to 330 million homes and may even extend its free food program into December.

 Gaura Sen Gupta, economist at IDFC First Bank Economics Research said, “Upward pressure on food inflation persists with nearly 60 percent of the food and beverages subcomponents by weight seeing 6 percent plus inflation in August.”

“August CPI inflation at 6.83 per cent was in line with our expectations of 6.86 per cent. Vegetable prices moderated and led much of the moderation in the August print. However, cereals and pulses continued to see upside and we need to be cautious of this trend being stickier. Core inflation at 4.9 per cent was similar to July print though tad higher than our expectation. CPI inflation should moderate further to around 5.5 per cent by December if the current trend of food prices persists. We continue to expect the RBI to remain cautious as inflation remains well above the 6 per cent mark. We maintain our call for an extended pause as the RBI watches for the domestic growth-inflation mix, food prices trend and impact on inflation expectations, and impact of global monetary policy decisions on the INR,” said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities.

Talking about the inflation in states, Rajasthan (8.60 percent) followed by Haryana and Telangana (8.27 percent), Odisha (8.23 percent) and Jharkhand (7.91 percent) recorded the highest inflation rate. While the lowest inflation was reported from Delhi (3.09 percent) followed by Assam (4.01 percent), West Bengal (4.790 percent) and Chhattisgarh (5.52 percent).