India’s August inflation remains within RBI’s sweetspot. Sparks hopes of a rate cut.

New Delhi: India’s retail inflation remained below 4% for a second successive month, sparking tempered expectations of a rate cut amid a coalescence of other favourable factors. Food prices, however, remain a worry.

Retail inflation in August inched up to 3.65% from July’s 3.6% rise, above the 3.5% increase economists polled byMint had expected, chiefly on account of stubborn food prices. Inflation has, however, stayed within the Reserve Bank of India’s medium-term target of 4% (within a band of plus or minus 2 percentage points).

At 3.65%, the latest inflation data is also the second lowest in 12 months, the lowest being in July.

“Recent inflation readings have consistently come in below the projections of the Reserve Bank of India, indicating a softening trend. Meanwhile, in the US, inflation has hit a three-year low, and with signs of a cooling labour market, a rate cut by the Federal Reserve in September 2024 seems inevitable,” said Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers.

“Despite this easing of inflationary pressures, lower-than-expected GDP growth for the quarter ended June 2024 and the likelihood of a rate cut by the US Fed, we expect RBI to maintain its current policy rate for now,” Hajra added. “However, the central bank’s stance and forward guidance are likely to turn more dovish, signalling potential future easing.”

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RBI has kept the repo rate—the interest rate at which it lends money to commercial banks and financial institutions—unchanged at 6.5% since February 2023. The regulator expects India’s real GDP growth at 7.2% and consumer price index-linked inflation at 4.5% for the ongoing fiscal year. India’s economy expanded at a blistering 8.2% in 2023-24, but moderated in the April-June first quarter of 2024-25.

Some economists said the August inflation was in line with their expectations.

“In line with our expectations, the CPI inflation inched up marginally to 3.7% in August from 3.5% in July, largely on account of an uptick in food inflation. Core inflation remained largely benign, remaining steady at 3.4% August. Despite a sequential decline in food prices, an unfavourable base effect has kept food inflation elevated in August,” said Rajani Sinha, chief economist, CareEdge.

Core inflation—goods and services excluding the more volatile food and energy prices—makes up nearly 50% of the basket.

“The overall outlook for the agriculture sector has improved due to a good monsoon and improved kharif sowing. However, challenges remain, particularly with the uneven distribution of monsoon rainfall. Several key agrarian regions are experiencing double-digit deficits in cumulative rainfall, including Bihar, Punjab, Gangetic West Bengal, Eastern Uttar Pradesh, and Assam,” Sinha said.

Targeting inflation

Regulating interest rates is a key instrument for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and the general public, which can, in turn, bring down consumer spending and inflation.

Food inflation in August was 5.66%, higher than the 5.42% rise reported for July—the lowest since June 2023, when food inflation was 4.55%. Food inflation had risen 9.36% in June, 8.69% in May, and 8.70% in April.

Food prices have remained elevated for over a year primarily due to last year’s uneven and below-normal monsoon rains. In August, the prices of cereals, meat, fish, milk products, pulses, sugar and confectionery fell sequentially, while prices of eggs, fruits, and vegetables rose during the month.

“The slight uptick in August inflation was largely led by surprise on the food prices, while core inflation remained steady. Overall, the (second quarter, July-September) average inflation appears to be lower by about 60bps than RBI’s estimate of 4.4%,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank. (A basis point, or bps, is one-hundredth of a percentage point.)

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“However, we continue to expect a full-year estimate at 4.5% and hence the RBI to remain focussed on inflation over the next few months,” Bhardwaj added. “Meanwhile, given benign global conditions and persistent easy liquidity conditions, we see a high probability of a change in the policy stance to neutral in the upcoming policy.”

Among states, Telangana reported the slowest retail inflation for August at 2.02%, followed by Uttarakhand (2.37%), and Delhi (2.52%). However, Assam, Bihar, Haryana, Kerala, Odisha and Uttar Pradesh witnessed higher-than-average inflation, indicating retail inflation is still considerably high in several states.

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Industrial output slightly up

India’s industrial output growth remained somewhat flat during July, as compared to June.

India’s industrial output growth recorded 4.8% in July, higher than the 4.7% reported in June, according to the MoSPI data released on Thursday. Economists polled by Reuters had expected growth of 4.7%.

Earlier, India’s factory output rose to a seven-month high of 6.2% in May, up from 5.5% in March and 5.2% in April, according to the final figures.

During July, manufacturing output rose 4.6% annually, up from the 2.6% growth reported during the previous month, according to the quick estimates.

Electricity generation growth fell to 7.9% annually in July, from 8.6% growth in June, while mining activity grew 3.7% in July against 10.3% growth registered in the previous month.

Capital goods production, a proxy for fixed investments, saw a 12% annual rise in July, against a 3.8 % annual rise in June, while consumer durables production, reflecting consumer sentiment, surged by 8.2% (against an 8.7% growth in the previous month).

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Infrastructure/construction goods production rose by 4.9% in July, against the 7.1% growth registered in the previous month.

Industrial output growth rose steadily during the last year, managing impressive gains of 10.9% in August and 11.9% in October, driven by strong mining output, festive demand for manufactured goods, and increased electricity generation.

However, growth fell to its lowest point of the year at 2.5% in November. Since then, industrial growth has shown signs of recovery.

“The YoY (year-on-year) growth in the IIP (index of industrial production) inched up slightly to 4.8% in July 2024 from the revised print of 4.7% in June 2024, led by the manufacturing sector, even as growth in mining output and electricity generation decelerated between these months,” said Aditi Nayar, chief economist at ICRA Ltd.

The rating agency anticipates year-on-year “growth in the IIP to ease to sub-3.0% in August 2024, amid the contraction in electricity and mining output owing to excess rains, as well as an adverse base…” Nayar added.