Inflation decreases, and industrial growth acquires

The Reserve Bank of India has more justification to limit the rate of interest rate increases after India's inflation slowed down even more in December, suggesting price pressures may have peaked. Despite concerns about a worldwide recession, the third-largest economy in Asia saw an increase in industrial output in November, which encouraged some people to remain positive about its future.

The consumer price index (CPI) eased to 5.72 percent in December from 5.88 percent in the previous month, while the Index of industrial production (IIP) expanded 7.1 percent in November after a 4.2 percent contraction in the previous month.

"CPI inflation at 5.72 percent in December confirms the downtrend which started in November. This will enable the RBI to go slow on rate hikes,” Geojit Financial Services Chief Investment Strategist V K Vijayakumar said in a note. “Along with easing inflation IIP rising to 7.1 percent in November reinforces the growth rebound story in India.

This means India can achieve a 6 percent GDP growth rate in FY 24 despite the global growth slowdown." The main cause for the cooling of retail inflation was a substantial easing in the rise of food prices, data from the National Statistical Office showed. Food inflation, which accounts for nearly 40 percent of the CPI basket, fell to 4.19 percent in December from 4.67 percent in the previous month.

The headline retail inflation has remained in the Indian central bank’s tolerance band of 2 to 6 percent for the second consecutive month. It fell below 6 percent in November after remaining above the upper tolerance limit for 10 consecutive months. The RBI has been mandated by the government to maintain retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026.

The RBI raised its key lending rate aggressively in the past year in an attempt to tame stubborn inflation. The cooling inflation and rebound in industrial growth will give the central bank some comfort in policy action when it reviews the monetary policy on February 6-8.

“We are extremely watchful of evolving inflation dynamics and look at data almost on a daily basis and we will keep an Arjuna's eye on inflation and we will be ready to act,” RBI Governor Shaktikanta Das said in December.

The industrial growth, as per the Index of Industrial Production (IIP), in November, is the highest in five months. With 12.7 percent year-on-year expansion, the electricity sector recorded the highest growth in November, followed by mining at 9.7 percent. The manufacturing sector posted a growth of 6.1 percent in November.

Retail prices have eased more in urban areas than in rural areas. In fact, inflation in rural India remained above the RBI’s tolerance limit in December. CPI-based inflation in rural India stood at 6.05 percent, while it was substantially lower at 5.39 percent in urban areas.

In its previous policy review announced on 7 December, the RBI hiked the policy repo rate by 35 basis points to 6.25 percent. One basis point is one-hundredth of one percentage point. For the financial year 2022-23, the central bank has pegged the retail inflation forecast at 6.7 percent.

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