Indian economy improves as CPI inflation drops to 4.25%, says ASSOCHAM

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May CPI data suggests that India’s macro picture is still steady," said ASSOCHAM Secretary General Deepak Sood. As headline inflation, based on the Consumer Price Index, dropped to 4.25 percent in May 2023, and industrial growth revived to 4.2 percent in April, Sood said, "Retail inflation is just about near the RBI target of four percent, while manufacturing is clearly showing an uptick as per the latest data. The Indian economy is on a steady move even in the midst of global challenges."

Retail inflation dropped from 4.70 percent in April 2023 to 4.25 percent in May 2023, which is a sharp decrease from 7.04 percent in May 2022.

Also read: CPI inflation drops to 4.25% in May, lowest in 25 months

Commenting on the figures, Rajani Sinha, Chief Economist, CareEdge, said: “The CPI inflation came broadly on expected lines supported by a favourable base and softer increase in food prices. Despite the moderation, cereals inflation continued in double digits whereas, milk, pulses, sugar, and spice inflation firmed due to limited supply… The supply-side measures taken by the government to contain prices of essential food items such as wheat and pulses augurs well for food inflation. However, uncertainties on the weather front and volatile crude oil prices pose an upside risk to our projections. On the policy front, we expect the RBI to maintain a status quo in 2023 with CPI inflation remaining above 4% target and growth impulses expected to hold up well.”

Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays, believes that inflation moderated further in May, thanks to a sequential easing in energy costs among other factors. He said: “Headline CPI moderated to 4.25% y/y in May, from 4.7% in March, broadly in line with our forecast (4.3%) and market consensus (4.3%). This was the lowest print since April 2021. Base effects continue to play a role in the moderation of headline, though some sequential easing was seen in energy costs. On a m/m basis, the sequential increase (0.5% m/m nsa) was mostly driven by perishable food prices.”

He added: “We expect headline CPI to stay between 4% and 5% for H1 FY2023-24, and are tracking June headline CPI at 4.2% y/y. For FY23-24, we maintain our forecast for CPI inflation at 4.7%, with risks evenly balanced, as falling energy prices are mitigated by El Nino risks. A moderating inflation trajectory for the near term and growth still looking steady imply the RBI is unlikely to cut rates for the rest of the fiscal year, in our view.”

ICRA Chief Economist Aditi Nayar, however, expects headline CPI inflation to rise mildly in June. He said: “The headline CPI inflation may rise mildly to 4.5-4.7 percent in June from 4.3 percent in May, based on the early uptrend in the prices of most of the food items, barring edible oils. Nevertheless, the average CPI print for Q1 2023-24 is likely to come in at 4.5 percent, marginally lower than the MPC’s revised projection of 4.6 percent for that quarter.”

Nayar added: “The hawkish tone of the June policy document, with the committee’s focus on bringing down the CPI inflation to 4.0 percent along with the 5 percent-plus CPI inflation projections for the next three quarters, implies that a pivot to rate cuts is quite distant. As a result, ICRA expects an extended pause through 2023-24, and the stance to remain unchanged over the next couple of policy meetings.”

Commenting on IIP figures, the ICRA Chief Economist said: “The IIP for April 2023 also surprised on the upside, printing at 4.2 percent in the month in spite of the unseasonal rainfall. The year-on-year performance of most available high-frequency indicators improved in May relative to April, which should support a 4-6 percent expansion in May.”

Echoing his thoughts, Sinha also said that the industrial output surprised on the upside, rebounding from subdued growth in the previous month. He, however, pointed out that going forward, a durable pick-up in domestic consumption, including rural consumption, remains critical for growth in industrial output. However, challenges from an uncertain global economic scenario and weak external demand are likely to persist.

Sharing his thought on the April IIP data, Bajoria said that Industrial production growth picked up in March, mostly off a low base. He explained: “India’s industrial output growth rose in April, at 4.2% y/y, versus 1.8% in March. The print was much higher than the market consensus (1.4%) The pickup is mostly due to a large base effect (which added +9.6ppt to the headline), as sequentially, output contracted by -7.4% m/m nsa…. Overall, sequential slowing in IP continues (on nsa basis), in contrast with soft data such as May PMI, which showed an acceleration in output (driven by domestic demand). However, some other hard indicators, including core infra-index, fuel, and power consumption, had already indicated likely sequential contraction in IP in April. That said, some improvement is visible in May on a sequential basis.”