Economy Pulse: India's CPI Rises To 3.65% In August 2024 Led By Food & Beverages Prices; IIP Growth At 4.8%

India's consumer price index (CPI) edged higher to 3.65% in August 2024, however, stayed below RBI's lower tolerance limit of 4%. Also, this is the second lowest point of inflation in the past 5 years. Nonetheless, CPI is also higher than the market estimate. Meanwhile, India's industrial output index surged to 4.8% on an annual basis in July 2024.

CPI Inflation:

CPI inflation came in at 3.65% in August 2024, due to a slight surge in rural inflation to 4.16% in the month, while urban inflation stood at 3.14%. In July 2024, CPI was at 3.60%, with rural and urban inflation rates at 4.10% and 3.03% respectively.

Notably, on year-on-year, CPI inflation has cooled off sharply. In August 2023, CPI inflation was at 6.83%.

Further, a spike in food inflation also contributed to the latest uptrend in CPI. The consumer food price index (CFPI) is at 5.66% in August 2024 compared to 5.42% in the previous month, and 9.94% in August of last year.

As per Trading Economics, the annual inflation rate in India increased to 3.65% in August 2024 from an upwardly revised 3.6% in July, which was the lowest since August 2019, and above forecasts of 3.55%. Despite the rise, it marks the second consecutive month that inflation has stayed below the RBI's target of 4% in five years, amid large base effects in food prices.

Aditi Nayar, Chief Economist and head of Research and Outreach at ICRA said, "The CPI inflation unexpectedly inched up to 3.7% in August 2024 from 3.6% in July 2024, in contrast with our forecast of an easing, largely led by the food and beverages segment. With the base effect normalising, we anticipate a sharp pickup in the CPI inflation to ~4.8% in September 2024 and range between 4.4% and 4.7% in H2 FY2025."

Nayar added, "The food and beverages inflation print rose to 5.3% in August 2024 from 5.1% in July 2024, led by an uptick in perishables such as vegetables and fruits. Although the former declined by 2.5% on a sequential basis in August 2024 after rising by ~14% in each of the last two months, the extent of the contraction was much smaller than our expectations."

Further, the economist highlighted that Kharif crops were sown on 109.2 million hectares by September 6, 2024, accounting for nearly 99% of the total area covered in the 2023 season, and exceeding the year-ago levels by 2.2%. ICRA remains watchful of the impact of episodes of heavy rainfall and flooding across some states on the standing crops, amidst the IMD's expectations of above-normal rainfall during September 2024 and the development of La Nina conditions by the end of this month. These could pose upside risks to the food inflation trajectory in the near term. However, healthy reservoir levels should support timely and plentiful rabi sowing.

Additionally, ICRA's economist said, the core-CPI (CPI excluding F&B, F&L, and petrol and diesel for vehicles) inflation eased slightly to 3.5% in August 2024 from 3.6% in July 2024, this is likely to be an intermittent dip; we expect the core CPI inflation print to inch up through the rest of the fiscal, in spite of the recent moderation in commodity prices, on account of demand for services, as well as the YoY decline in the sowing of cotton.

ICRA estimates the headline CPI inflation to rise to ~4.8% in September 2024 from 3.7% in August 2024, led by a sharp uptick in the food and beverages inflation print amid the fading of the elevated base (food and beverages inflation: +6.3% in Sep 2023 vs. +9.2% in Aug 2023). Notwithstanding the anticipated hardening in September 2024, the average CPI inflation will undershoot the MPC's Q2 FY2025 estimate of 4.6%. With the Q1 FY2025 GDP growth print (+6.7%), having undershot the MPC's forecast for the quarter (+7.1%), a change in stance in the October 2024 policy meeting can't be entirely ruled out.

India Industrial Production (IIP):

The IIP growth rate for the month of July 2024 is 4.8 percent which was 4.7% in the month of June 2024. As per Ministry of Statistics & Programme Implementation data, the growth rates of the three sectors, Mining, Manufacturing and Electricity for the month of July 2024 are 3.7 per cent, 4.6 per cent and 7.9 per cent respectively.

While the Quick Estimates of IIP stands at 149.6 against 142.7 in July 2023. The Indices of Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of July 2024 stand at 116.0, 148.6 and 220.2 respectively.

Within the manufacturing sector, top three positive contributors for the month of July 2024 are - "Manufacture of basic metals" (6.4%), "Manufacture of coke and refined petroleum products" (6.9%), and "Manufacture of electrical equipment" (28.3%).

As per the use base classification, the indices stand at 150.1 for Primary Goods, 114.4 for Capital Goods, 164.3 for Intermediate Goods and 178.7 for Infrastructure/ Construction Goods for the month of July 2024. Further, the indices for Consumer durables and Consumer non-durables stand at 126.6 and 146.8 respectively.

Nayar said, "The YoY growth in the IIP 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. Interestingly, four of the six use-based segments, excluding capital and intermediate goods, witnessed a deterioration in their performance in July 2024 vis-à-vis June 2024, signalling that economic activity remains fairly uneven."

ICRA anticipates the YoY 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 (+10.9% in Aug 2023 vs. 6.2% in Jul 2023)."