Factory output at 14-month high; inflation below RBI’s upper limit

There were positive developments on the economic data front on Thursday as headline retail inflation for September fell below the Reserve Bank of India’s upper tolerance after two months, and industrial output for August touched a 14-month high, according to official data released by the National Statistical Office.

Retail inflation as measured by the Consumer Price Index (CPI) eased to 5.02 per cent in September from 6.83 per cent in the previous month and a 15-month high of 7.44 per cent recorded in July. CPI inflation, which the RBI tracks for its monetary policy action, has come within the central bank’s comfort zone of 2-6 per cent range after a gap of two months.

Easing food prices played a key role in bringing back retail inflation within the RBI’s comfort zone. Food inflation, which accounts for nearly half of the CPI basket, declined to 6.56 per cent in September from 9.94 per cent in the previous month and 11.51 per cent recorded in July.

Industrial output, as measured by the Index of Industrial Production (IIP), posted 10.3 per cent growth in August, the fastest expansion in 14 months. Two out of the three sectors of the IIP posted growth in double digits. Electricity production surged by 15.3 per cent year-on-year during the month under review, while mining output increased by 12.3 per cent.

Manufacturing, which accounts for over three-fourths of IIP, registered a growth of 9.3 per cent in August, almost double when compared with the 4.6 per cent expansion recorded in July.

Reacting to the data, at the G-20 meeting of finance ministers and central bank governors in Marrakech, Morocco on Thursday, RBI Governor Shaktikanta Das said the latest inflation data is exactly in line with the central bank’s projections.

Both industrial production, as well as inflation data, look impressive partly due to favourable base effects. Industrial production had contracted by 0.7 per cent in August 2022. On the other hand, the decline in inflation data comes on the back of a high base as retail inflation stood at 7.41 per cent in September 2022, while food inflation was recorded at 8.60 per cent.

Analysts said inflation is likely to remain volatile in the coming months due to uncertainties on crude oil prices and poor monsoon. “Our projections suggest that the headline CPI inflation will remain volatile in a wide range until June 2024, with the outlook for food inflation remaining murky and continuing volatility in crude oil prices,” said Aditi Nayar, chief economist at ICRA.

Vegetable prices eased sharply in September. Annual inflation in vegetables declined to 3.39 per cent in September from 26.14 per cent recorded in the previous month. However, inflation in cereals, pulses and spices remained elevated.