Headline retail inflation likely dropped sharply in October, the first month after the Reserve Bank of India (RBI) failed to meet its inflation mandate, but stayed above the central bank’s 6 per cent upper bound for the tenth month in a row.
According to a Moneycontrol poll of 16 economists, Consumer Price Index (CPI) inflation is expected to have fallen to 6.7 per cent in October from 7.41 per cent in September, thanks to a favourable base effect.
The Ministry of Statistics and Programme Implementation will release retail inflation data for October at 5.30 pm on November 14 but before that, it will release the industrial production data for September on 11 November.
IIP growth
Industrial growth, as measured by the Index of Industrial Production (IIP), is seen rising to 2.3 per cent in September from August’s 18-month low of -0.8 per cent, according to the median of estimates of 14 economists polled by Moneycontrol.
“While a fading of unfavourable base effects was likely the primary driver, the performance of lead indicators also improved—both exports and core sector growth picked up month on month, and auto production growth stayed strong,” said Kanika Pasricha, an economist at Standard Chartered Bank.
Data released on 31 October showed growth in India’s eight core industries surged to 7.9 per cent in September, up from 4.1 per cent in August.
The performance of the core industries is key to industrial growth as they make up around 40 per cent of the IIP.
“Many product groups across the manufacturing sector expected a noticeable improvement in the festival season that starts from Onam, covers Durga Puja, and ends with Diwali. It needs to be seen whether this momentum would sustain beyond the festive cheer,” added Rupa Rege Nitsure, group chief economist at L&T Financial Services.
Inflation fall
While industrial output is seen rising in September, inflation is expected to have fallen by more than half-a-percentage point in October.
At 6.7 per cent, economists’ prediction for last month’s inflation print would be the lowest since February, though inflation clocked in at 6.71 per cent in July.
In October 2021, the base period for the forthcoming inflation number, the general index of the CPI jumped 1.4 per cent month-on-month. Meanwhile, the index has increased, on average, by 0.5 per cent month-on-month in each of the last four months. As such, a similar increase in the index last month will see inflation fall to 6.5 per cent.
While inflation is set to decline, economists say the sequential price momentum continued in October.
“While food inflation is likely to moderate due to base effects, food prices still rose sequentially due to a spike in perishables such as vegetables, fruits and milk,” noted Rahul Bajoria, chief India economist at Barclays.
Of the 22 food items for which the Department of Consumer Affairs compiles data, 15 saw a month-on-month increase in prices. This includes a 12 per cent rise in the prices of tomatoes, a 7.6 per cent rise in onion prices, and a 1.5 per cent increase in milk prices.
According to Bajoria, food and beverage inflation likely eased to 6.7 per cent in October from 8.41 per cent in September.
Uncomfortably high
While headline retail inflation has come off appreciably from the near eight-year high of 7.79 per cent in April, it remains uncomfortably high.
October will mark the entry of CPI inflation into a fourth year above the RBI’s medium-term target of 4 per cent. The last time inflation was under 4 per cent was in September 2019, when it had come in at 3.99 per cent.
It will also be the tenth straight month in which it will be outside the central bank’s mandated 2-6 per cent tolerance range. With the RBI’s failure confirmed by the September inflation number of 7.41 per cent, the Monetary Policy Committee (MPC) met last week to discuss the report the central must submit to the government.
A second successive failure of the RBI, which would occur if average CPI inflation is outside the 2-6 per cent band in the next three quarters till April-June 2023, is, however, unlikely.
The RBI’s latest forecast says inflation will average 6.5 per cent in October-December 2022 and 5.8 per cent in January-March 2023 before easing to 5.2 per cent in FY24.
“…if the current trend persists, then CPI inflation is likely to average higher than RBI’s forecast of 6.5 per cent average for October-December 2022,” noted Kaushik Das, Deutsche Bank’s chief economist for India.
Das sees CPI inflation averaging 6.9 per cent in both, the third quarter of FY23 and FY23, before easing to 5.5 per cent in FY24.
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