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Inflation Relief, IIP Boost May Not Be Enough For Monetary Policy Panel

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The Indian economy got a twin boost as consumer inflation fell more than expected and industrial output growth remained strong. Yet, that may not be enough for the monetary policy committee to change its outlook in its review next month even as a nascent recovery looks visible.

CPI inflation in India stood at 4.4 percent in February slowing for the second straight month from a 17-month high, according to data released by the Central Statistics Office today. Economists polled by Bloomberg had forecast retail inflation at 4.7 percent. The Index of Industrial Production rose 7.5 percent in January, compared to the estimated 6.4 percent.

India’s GDP growth picked up pace in the quarter ended December as manufacturing and agriculture growth improved after twin disruptions of the note ban and the Goods and Services Tax. Inflation worries, the MPC said, have not abated. The data released Monday is the last set of inflation numbers that India's monetary policy committee will have to work with before it meets next month. For a while now, the MPC has maintained its neutral stance and kept rates on hold citing risk of heightened inflation. The February inflation is lower than the Reserve Bank of India’s 5.1 percent estimate for the January-March period. But the committee expects inflation to rise again in the first quarter of next fiscal.

“I don’t think this indicates that inflation concerns are behind us. It reinforces the expectation that there will be a pause in the policy,” Aditi Nayar, principal economist at ICRA Ltd. told BloombergQuint.

There is an enormous amount of volatility that we see in the Indian CPI every month. That’s going to be somewhat of a challenge as far as policymakers are concerned.
Aditi Nayar, Principal Economist, ICRA

Mainly, the moderation in inflation has come from the decline in food and vegetable prices, said Sunil Sinha, principal economist at India Ratings & Research.

Higher vegetable prices, especially the seasonal surge seen in onions and tomatoes, has pushed up retail inflation since June last year when it hit an all-time low. However, a fresh supply of tomatoes starting December-end and onions starting March-end is expected to pull prices lower. Though prices eased in December, the seasonal food price moderation in winter was less than usual, the RBI noted in its February outlook.

It is important for the MPC to assess whether this decline in food prices is sustainable or a temporary blip, added Sinha. “We know that as winter wanes, typically prices tend to again increase,” he said. “Even though a decline in retail inflation is good, we should keep our fingers crossed as far as the future trajectory is concerned.”

In such circumstances, RBI will remain guarded. They will remain in a pause mode as far as policy rates are concerned.
Sunil Sinha, Principal Economist, India Ratings & Research

The key factors to look at for inflation would be the rabi crop harvest, monsoon expectations, customs duty hike and the impact of the minimum support prices for crops announced in the Union Budget, Nayar said.

Manufacturing Leads Factory Output

India’s factory output growth was led by a sharp rise in the manufacturing sector, partly aided by from a low base in the same month last year as operations were disrupted from the government's cash purge.

Sixteen of the 23 industry groups in the manufacturing sector showed growth, according to CSO's data. Manufacturing output rose 8.7 percent over January last year.

“If you look at the IIP, of course the base effect is there, but it is encouraging to see some kind of a consistency in IIP growth,” Sinha said. “More heartening is the fact that this is led by manufacturing, which has the highest weight in IIP,” he added.

Industrial production has been rebounding since October when it slowed to 2.2 percent. Since then it has kept growing in the high-single-digit range. Sinha sees this trend sustaining in the future as the industry recovers from the twin shocks of demonetisation and GST. “This is not a one-off,” he said. On a net basis, this indicates that the pains from the twin shocks are being left behind, he added.

The industry is gradually is finding its feet. If we see this trend continuing for a few more months, then one can hope that industrial recovery is on track.
Sunil Sinha, Principal Economist, India Ratings & Research

It is not just the base effect that is propping up industrial growth, added Nayar. “Some real growth is visible.”

She expects industrial production to see moderately healthy growth this year.

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