CPI inflation set to fall to 7% in August, July IIP growth may rise to 5%

India's headline retail inflation is expected to have declined in August but stayed well above the 6-percent upper band of the Reserve Bank of India's (RBI) 2-6 percent tolerance range. According to a Moneycontrol survey of 21 economists, Consumer Price Index (CPI) inflation likely fell to 7.0 percent in August from July's 15-month high of 7.44 percent.

The Ministry of Statistics and Programme Implementation will release retail inflation data for August and industrial production data for July later today at 5:30 pm. Economists expect industrial growth, as per the Index of Industrial Production (IIP), to have increased to 5.0 percent.

Industrial growth fell to a three-month low of 3.7 percent in June.

Inflation internals

The near-half-a-percentage-point fall in CPI inflation in August is set to come on the back of a drop in prices of food items, thanks to the supply-side measures taken by the government. However, economists see the impact of lower vegetable prices, especially those of tomatoes, to be felt in September, and not August.

"In our view, August CPI inflation may have stayed above 7 percent as tomato prices did not fall much month-on-month (MoM) despite a sharp 60-70 percent correction in the latter half of August versus the monthly peak. The cooling of tomato prices was likely partly offset by a spike in onion prices, which have the same weightage as tomatoes in the CPI basket," noted Kanika Pasricha, economist at Standard Chartered Bank.

Also Read: MPC's Shashanka Bhide sees CPI inflation falling below 7% in August

Pasricha expects food and beverage inflation to have stayed close to double digits in August. In July, it printed in at 10.57 percent.

"As per the Department of Consumer Affairs (DCA) data, we know that tomato prices moderated to Rs 54 per kg by end-August, after peaking around Rs 152 per kg in the first week of August. But the DCA data shows that the average tomato price for August is Rs 102 per kg, compared to Rs 109.5 per kg in July, indicating only a 7 percent MoM decline," Das noted, saying that this added uncertainty to any forecasts.

"Will the authorities take the average price of vegetables for August, or the end-August numbers? This brings in significant uncertainty to near-term inflation forecasting," he added.

The other volatile component of the CPI, fuel, is expected to see its inflation level jump to over 5 percent from 3.67 percent in July due to the fading of base effects and sequential increase in kerosene prices and higher electricity tariffs, according to Barclays economists.

Also Read: MPC's Ashima Goyal calls on states to cut fuel tax, oil firms to lower prices

"We estimate that the impact of the Rs 200 per cylinder cut in LPG prices announced in late August, which will reflect only from the September CPI print, will likely shave 20-25 basis points from the headline rate," they added.

Finally, core inflation – or inflation excluding food and fuel – likely eased further in August to around 4.8 percent from 4.9 percent in July.

Policy impact

After the July inflation shocker, markets and the RBI are prepared for only a modest fall in inflation in August, with hopes pinned on September to bring down the inflation trajectory more in line with the central bank's forecast.

On August 10, the RBI raised its CPI inflation forecast for July-September by 100 basis points to 6.2 percent and by 30 basis points to 5.4 percent for 2023-24 as a whole even as its Monetary Policy Committee (MPC) left the repo rate unchanged at 6.5 percent for the third meeting in a row.

While economists see average inflation for July-September exceeding the RBI's forecast, the central bank's decision to not change its projection of 5.2 percent for January-March 2024 is seen as a positive.

"The fact that RBI has not changed the longer-term inflation forecast should provide comfort to the markets, as it indicates that the central bank expects inflation to continue on its gradual path of moderation towards the 4 percent mandated target, even after factoring in the short-term intra-quarter volatility," Deutsche Bank's Das said.

Standard Chartered Bank's Pasricha continues to see the MPC cutting the repo rate by 50 basis points starting June 2024.

Industrial growth

The statistics ministry will also release the IIP data for June at 5:30 pm today, which is expected to show output growing by 5.0 percent, up from 3.7 percent in June, according to estimates of 17 economists.

High-frequency data suggests India's industrial growth may have picked up some pace in July. While data released on August 31 showed core sector growth cooled slightly to 8 percent year-on-year from 8.3 percent in June, the manufacturing Purchasing Managers' Index (PMI) was largely unchanged at 57.7 in July compared to 57.8 in June.

The eight core industries - coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and electricity - make up around 40 percent of the IIP. As such, they are seen as lead indicators of industrial growth data. Similarly, PMI data – which is an indicator of month-on-month change in activity levels – is also seen as providing advance signals on economic conditions.

"Going ahead, highly uneven monsoon rainfall and a long dry spell in the month of August do not augur well for rural demand. External sector headwinds, too, will weigh on manufacturing sector growth," Nitsure added.

India's merchandise exports contracted by 16 percent in July.