Consumer price index (CPI)-based inflation rose to a nine-month high of 5.5% in September from 3.7% in August on high and volatile prices of vegetables, oils and costlier gold. At the same time, the index of industrial production (IIP) contracted by a slight 0.1% year-on-year (y-o-y) in August, a reversal from the 4.7% growth recorded in July. While an adverse base effect was at play, IIP also contracted sequentially this month, says a research report.
In September, CPI inflation rose to a nine-month high of 5.5% from 3.7% in August, while food inflation jumped to 9.2% from 5.7% during the same period a year ago.
According to the note from CRISIL Ratings, the lowest income class faces the highest inflation. "The effect of inflation varies across income groups since the share of spending on food, fuel and core categories differs for classes. Essential items, such as food and fuel, occupy a greater share in the consumption basket of those with a lower income."
"During September, urban food inflation (9.6%) outpaced rural food (9.1%) in contrast to the trend seen in the past few months. The poorest segments (bottom 20%) in both rural and urban areas saw the sharpest rise in inflation rates compared with their richer counterparts since food inflation surged. The richest segment in urban areas faces the lowest inflation rate as core items make up the largest share of their consumption basket. Core inflation remained well below food inflation in September," it says.
Commenting on CPI inflation, the rating agency says, while a low-base effect was expected to statistically lift the gauge, three factors on the ground were at play as well. "One, fruits and vegetables, where the base effect turned adverse and the damage caused by unseasonal or excess rains led to a sequential price rise. High and volatile vegetable prices, with inflation at 36%, continue to be the sharpest pain point plaguing food inflation, which rose to 9.2%."
"Two, prices of edible oils have been rising globally, with lower production from last season adding fuel to fire. And three, costlier gold pushed up inflation in the 'personal care' segment of core inflation. This, in turn, hauled the core barometer to a nine-month high," it added.
Given that the monsoon season wound up with an 8% surplus, CRISIL says kharif sowing is healthy (101% of the full-season normal acreage) and the harvest will enter the market in October, food prices should start easing at least sequentially. "Under this assumption, we expect CPI inflation to average 4.5% this fiscal compared with 5.4% in the last, mainly led by softer food inflation and a mild uptick in non-food inflation."
However, a sharper-than-expected rise in September inflation, mainly coming from a steep sequential rise in vegetables, is a point of worry, it says, adding October data also bares a further pickup in vegetable prices.
Last week, the monetary policy committee (MPC) of the Reserve Bank of India (RBI) took a step closer to cutting the repo rate by changing its stance to 'neutral'.
According to the rating agency, visibility on a durable decline in inflation will be the next key determinant of a rate cut. It says, "Our base case is a 25bps (basis points) reduction in the repo rate during the MPC's policy review meeting in December. Trouble on the food inflation front can delay this further."
CRISIL says vegetables and edible oils are the key drivers of higher food inflation. Vegetable inflation jumped to a 14-month high of 36% compared with 10.7% in August. Tomatoes (42.2% vs -47.2%), garlic (70.9% vs 47.1%) and onions (66.1% vs 54.1%) led the surge. Vegetable prices were up 5.5% month-on-month (m-o-m) (seasonally adjusted), the fastest m-o-m rise since November 2023. Excluding vegetables, food inflation moderated to 4% from 4.5%.
"Edible oil inflation turned positive for the first time since January 2023, at 2.5% vs -0.9%. Prices rose sharply by a seasonally adjusted 3% month-on-month," it added.
Fuel inflation remained negative for the 13th straight month, but the pace of deflation slowed relative to August to -1.4% vs -5.3%. "The high base effect in liquified petroleum gas (LPG) faded somewhat as a subsidy of Rs200 per cylinder had begun from 30 August 2023. The additional Rs100 per cylinder subsidy that came into effect in March 2024 kept LPG inflation negative. Accordingly, LPG inflation still rose to -10.1% from -24.6%."
Commenting on IIP, CRISIL says industrial production underwent a broad-based deterioration across both the industrial and consumption sectors. "However, the contraction could be transitory since it was driven by adverse base effects and heavy rainfall dampening output. The onset of the festive season in the third quarter could improve consumption. Prospects look better for consumption this year as rural demand – the laggard last year – is likely to pick up on a good monsoon and higher agricultural production."
"However, a lower fiscal impulse from government amid elevated interest rates can weigh on growth. Additionally, slower global growth could impact manufacturing exports, even as global trade flows pick up. Investment growth hinges on an uptick in the private sector. Overall, we expect India's gross domestic product (GDP) growth to moderate to 6.8% this fiscal, compared with 8.2% in fiscal 2024," the rating agency says.
The rating agency says industrial activity could benefit from the onset of the festive season in the third quarter of this fiscal. "RBI's latest survey shows a pickup in consumer confidence in September. That said, the impact of excess and unseasonal rains remains a monitorable. Additionally, elevated interest rates could weigh on consumption, especially in urban areas where credit penetration is higher."
"High-capacity utilisation and lean balance sheets of corporates and banks remain conducive for private corporate investment. This could help sustain overall investment momentum this fiscal, even as government capex is slated to revive in the second half of the fiscal. However, a lower fiscal impulse would dampen growth this year, as the government trims its fiscal deficit," CRISIL says.