India’s retail inflation, gauged by the Consumer Price Index (CPI), inched lower to 5.09% in February 2024, a slight dip from January’s 5.10% reading, according to provisional data released by the National Statistical Office (NSO).
While the moderation in the headline inflation rate provides some relief, persistent high food prices remain a nagging concern for policymakers and consumers alike.
The introduction sets up the key details – India’s February 2024 CPI inflation rate at 5.09%, and the continuing issue of high food inflation despite an overall easing of price pressures.
Food Fueling Fire
India’s consumer food price index (CFPI) shot up to a worrying 8.66% in February from 8.3% in the previous month, evidence that kitchen budgets remain under severe strain.
Vegetables witnessed scorching double-digit inflation of 11.6%, while prices of cereals, milk, and related products also remained elevated.
Monsoon vagaries, supply chain disruptions, and the lingering impact of the Russia-Ukraine conflict on global food supplies have stoked food inflation in recent months.
Economists warn that until food prices stabilize, overall inflation will remain sticky and above the Reserve Bank of India’s (RBI) tolerance band of 2-6%.
Core Inflation Slows
There was, however, some respite on the core inflation front, with the measure stripping out volatile food and fuel prices easing to 3.3% from 3.8% in January.
Softer core price pressures reflect subdued domestic demand conditions and the impact of the RBI’s monetary policy tightening over the past year.
Sector-wise, housing inflation stood at 2.88% while fuel and light prices remained in deflationary territory at -0.77%.
But clothing, footwear, and personal care products saw prices accelerate.
Urban vs Rural Divide
Urban residents benefited more from the moderation in February inflation, with the CPI print cooling to 4.78% from 4.92% in January.
But for rural India, where food has a higher weight in consumption baskets, inflation remained stubbornly high at 5.34% – unchanged from the previous month.
This divergence underscores the disproportionate impact of food inflation on rural households and the vast urban-rural divide in purchasing power and living costs.
Industrial Production Rebounds
Separate data showed a healthy rebound in industrial activity in January, with the Index of Industrial Production (IIP) expanding 3.8% year-on-year after contracting for two straight months.
The manufacturing sector led the upturn, clocking 4.2% growth, followed by mining at 3.9% and electricity at 9.9%.
Capital goods and consumer durables were the outperformers, a potential leading indicator of improving investment and consumption demand in the economy.
Policy Conundrum
The latest inflation and IIP prints have analysts divided on whether the RBI will press ahead with further rate hikes or pause its tightening cycle at the upcoming monetary policy review in April.
“Food inflation remains unacceptably high and will likely keep headline CPI elevated over the next few months,” said Rahul Singh, an economist at SBI Funds Management. “The RBI may have to stay hawkish and raise rates by another 25 basis points to prevent inflation from becoming entrenched.”
But others like Sajjid Chinoy of JPMorgan argue that slowing core inflation and industrial momentum signal Policy review pivotal the economy is on the mend. “The RBI should avoid overtightening and pause its rate hike cycle, as it risks hurting the growth recovery.”
Market Reaction
Markets appeared to interpret the data as opening the door for a pause by the RBI. The Nifty ended the day up 0.7% while the 10-year bond yield slipped 6 basis points as traders pared bets on further rate increases.
The 3.8% annual growth in the IIP for January was underpinned by a broad-based upturn across sectors and product categories:
- Manufacturing PMI Rising: The manufacturing PMI, a leading indicator, has been in expansionary territory for five straight months through February, auguring well for industrial production in the coming months.
- Capital Goods Upswing: Capital goods output surged 14.6% year-on-year in January, signaling improving capital expenditure and investment demand in the economy.
- Infrastructure Push: Production of infrastructure and construction goods accelerated to 8.3% growth, boosted by the government’s sustained infrastructure push via schemes like PM Gati Shakti.
- Consumer Story Mixed: While consumer durables clocked an impressive 11.6% expansion, non-durables rose a tepid 1.3% – highlighting uneven consumption demand amid high inflation.
- Primary and Intermediate Products Rebound: Both primary goods and intermediate goods rebounded after contracting for two straight months, signaling improved basic materials offtake.
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