CPI inflation may have hit 3-month low of 5.4% in September

While headline retail inflation is expected to have fallen to a three-month low in September, industrial growth may have surged to a 14-month high in August.

India's headline retail inflation likely fell to a three-month low in September, returning to the Reserve Bank of India's (RBI) tolerance range of 2-6 percent after two months. According to a Moneycontrol survey of 20 economists, Consumer Price Index (CPI) inflation likely fell to 5.4 percent from 6.83 percent in August.

The Ministry of Statistics and Programme Implementation will release retail inflation data for September and industrial production data for August later today on October 12 at 5:30 pm. Economists expect industrial growth, as per the Index of Industrial Production (IIP), to have surged to 9.1 percent from 5.7 percent in July.

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At 9.1 percent, August IIP growth would be the highest in 14 months.

Inflation internals

Inflation may have been pulled down by nearly one-and-a-half percentage points in September on the back of a massive 62 percent month-on-month (MoM) fall in tomato prices as they returned to normal territory. However, at the same time, onion prices rose 12 percent in September over August, while cereals and pulses also saw their prices increase on a sequential basis, data from the Department of Consumer Affairs showed.

While cereal prices were up 1-1.6 percent MoM, those of pulses rose 1.5-5.9 percent.

Edible oil prices, meanwhile, likely exerted downward pressure as they were largely lower last month.

"Taking all these factors into consideration, we have forecasted the food and beverages component to be down 2.1 percent MoM in September versus a 0.5 percent MoM decline in August, which results in a year-on-year food inflation rate of 6.0 percent in September, lower than the 9.2 percent outturn in August," Kaushik Das, Deutsche Bank's Chief Economist for India and South Asia, said.

"Sequentially, we expect overall fuel prices to fall. While international oil prices increased 8.8 percent MoM in September, as there has been no pass-through to domestic prices by the oil marketing companies, the impact on fuel CPI is nil," Barclays said in a note.

Finally, core inflation—or inflation excluding food and fuel—may have remained at 4.8-4.9 percent in September.

Policy impact

A print of 5.4 percent in September would take the average for July-September to 6.6 percent. However, the RBI's latest forecast for the quarter, released on October 6, implies an inflation reading of 4.8-5 percent.

The lowest forecast by economists surveyed by Moneycontrol was 5.13 percent, made by Radhika Piplani, Chief Economist at DAM Capital Advisors.

While a return to the 2-6 percent tolerance range will be welcomed by the RBI and its Monetary Policy Committee (MPC), CPI inflation's 4 percent-plus journey is set to enter a fifth year. And while most economists see the MPC continuing to leave the repo rate unchanged at 6.5 percent for the rest of 2023-24—with the next rate action likely being a cut sometime in the middle of 2024—a minority still sees the possibility of a rate hike.

"…the governor emphatically reiterated that their inflation target is 4 percent and not 2- 6 percent. A closer look at the monetary policy statements between August and October highlights the increased urgency around the same," Aastha Gudwani, India Economist at Bank of America Securities, wrote in a note on October 6.

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"The recent vegetable price spike did delay CPI inflation's march towards the 4 percent target. As RBI's staff estimates still see CPI averaging at 4.5 percent in 2024-25, we continue to see another hike in 2023-24 accompanied by a change in stance to neutral," Gudwani added.

Industrial growth

The statistics ministry will also release IIP data for August at 5:30 pm later today on October 12. The data is expected to show that output jumped by 9.1 percent—the most in 14 months—according to the estimates of 16 economists.

Industrial growth had come in at 5.7 percent in July.

"Moreover, we see a marginal upside risk to our forecast if August manufacturing activity turns out to be stronger than our estimate," Sahay added.

Sahay expects manufacturing output growth to rise to 8.3 percent in August from 4.6 percent in July, while overall IIP growth is seen at 10.0 percent.

Data released on September 29 showed core sector growth hit a 14-month high of 12.1 percent in August. With the eight core industries—coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and electricity—making up around 40 percent of the IIP, it is seen as a lead indicator of industrial growth data.

Other high-frequency data also suggest a pick-up in industrial activity, with the manufacturing Purchasing Managers' Index—an indicator of month-on-month change in activity levels—rising to 58.6 in August from 57.7 in July.

The capital expenditure of the central and state governments also likely boosted the production of infrastructure and capital goods in August, said Rupa Rege Nitsure, group chief economist of L&T Finance.