‘Best of both worlds’ – economists give thumbs-up to CPI, IIP data

Robust growth in industrial production amid cooling inflation spells good news for the Indian economy.

Economists have been left pleasantly surprised by the latest inflation and industrial growth data, as the Indian economy continued to post better-than-expected numbers.

Data released on October 12 showed that while headline retail inflation fell more than anticipated to a three-month low of 5.02 percent in September, industrial growth jumped to a 14-month high of 10.3 percent in August.

Also Read: Retail inflation drops to 5.02% in September, lowest in 3 months

The average of economists' forecasts for Consumer Price Index (CPI) inflation for September was 5.4 percent, while that for industrial growth, as measured by the Index of Industrial Production (IIP), was 9.1 percent.

"Overall, a great set of data, falling inflation and strong growth," noted Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services. Gaura Sen Gupta, India Economist at IDFC First Bank, called the two data points "best of both worlds".

Inflation relief

The journey made by CPI inflation over the past few months has been nothing short of extraordinary, with the tomato fireworks propelling it to a 15-month high of 7.44 percent in July. Now, just two months later, it has come down by almost one-third—again thanks to the humble tomato.

What the lower-than-expected inflation number ensured was that the RBI's forecast of 6.4 percent for July-September was unexpectedly met. The forecasts, revised upwards by only 20 basis points on October 6, implied an inflation reading of 4.8-5 percent for September. No economist surveyed by Moneycontrol went as low as that, with Radhika Piplani of DAM Capital Advisors being the closest at 5.13 percent.

"The lower-than-expected print in September and with inflation tracking below 5 percent for October (as per daily data), we do see downside risks to our forecasts," economists from HDFC Bank said in a note on October 12, adding that they see inflation averaging close to 5.3 percent in 2023-24—10 basis points lower than the RBI's forecast of 5.4 percent.

One basis point is a hundredth of a percentage point.

While headline inflation returning to the RBI's tolerance range of 2-6 percent after a gap of two months is good news, core inflation is the gift that keeps on giving, with Moneycontrol's calculations showing inflation excluding food and fuel fell to a fresh multi-year low of 4.5 percent in September from 4.8 percent in August.

According to IDFC First Bank's Sen Gupta, the fall in core inflation suggests price pressures have not generalised.

Industry out-performance

On the activity side, IIP growth exceeded expectations handsomely, rising to 10.3 percent from July's revised print of 6.0 percent as the mining and electricity sectors expectedly got a leg up from a parched August. At the same time, the sometimes-maligned manufacturing sector put in a strong showing, with output growth nearly doubling to 9.3 percent from 5.0 percent in July.

"Infrastructure and construction goods continues to outperform," QuantEco Research's economists noted as the sector posted a double-digit growth rate for the fifth month in a row thanks to "relentless support from public capex".

Also Read: Early trends predict strong festive season sale for e-commerce companies

On the consumption side, production of durables and non-durables rose by 5.7 percent and 9 percent, respectively, which Suman Chowdhury, Chief Economist at Acuité Ratings & Research, attributed to stocking requirements during the festive season.

Words of caution

Of course, it was not all good news, with the outlook for inflation—particularly food inflation—remaining uncertain. While price pressures among perishables have reversed rapidly, they are persistent for non-perishables, said Madhavi Arora, Lead Economist at Emkay Global Financial Services, who thinks it is "still looking pretty difficult" for food inflation to be under 6 percent in the second half of 2023-24.

Food inflation fell to 6.56 percent in September from 9.94 percent the previous month.

There is also the small matter of the medium-term inflation target of 4 percent, which the RBI has emphasised rather strenuously in recent months.

Also Read: RBI doubles down to ward off complacency as long rate pause gets longer

"While 5 percent is reached, the task downhill to the 4 percent (target) will remain a challenge in the near future," said Anitha Rangan, Economist at Equirus.

Headline retail inflation was last below 4 percent exactly four years ago.

Some uncertainty also reigns on the production side, particularly with regards to consumer goods.

"…the upcoming festive season could provide an impetus to the consumption scenario in the economy," CareEdge Economists Rajani Sinha and Akanksha Bhende noted, adding that cooling retail inflation could boost consumption, although high food inflation and weakness in rural demand due to the uneven rainfall could be issues.

ICRA Chief Economist Aditi Nayar also warned of an "optical boost" in the September and November IIP numbers due to the year-to-year changes in the festival calendar, while October could see some moderation.

Diwali, which fell in late October in 2022, is going to be in the second week of November this year.