Inflation lower; industrial growth higher – domestic delights in an uncertain world

It was one of those rare double delights: Consumer inflation, or CPI, for February at 3.61% has come in lower than the CNBC-TV18 poll estimate of 3.85%, while January industrial output (IIP) at 5% has come in higher than the poll estimate of 3.4%. Nothing pleases as much as a higher delta for growth and a lower delta for inflation. While it is fair to expect more rate cuts and higher output in the months to come, the reciprocal tariffs threatened by President Trump hang like a sword over the economy’s prospects.

But let us celebrate the good news first. Here’s what is celebratory about the latest inflation data:

1. February is the second consecutive month that consumer inflation has come in lower than expected. In January, CPI came in at 4.26% versus the expectation of 4.5%. Now, the consensus expectation for March is that CPI inflation will come in at 3.8–4%.

2. This means the Q4 CPI, i.e., the January–March CPI, will average 3.9% versus the RBI forecast of 4.4%—a whopping 50 basis points lower than the RBI’s trajectory.

3. The April rate cut was never in doubt, but many had expected only two cuts in this cycle. The consensus has now moved to a firm expectation of three cuts. This means the repo rate, which is now at 6.25%, will touch 6% in April and 5.75% in June.

4. There may be more for bond buyers. The RBI has already been infusing large doses of liquidity into the market. In March alone, it is infusing ₹1.87 trillion through forex swaps and open market (OMO) purchases of government bonds. In May, the bank is expected to declare a dividend of ₹2.5–3 trillion. Such a large amount of liquidity infusion in one go can push the call rate towards the reverse repo. Given this imminent liquidity gush, the RBI-MPC may find it prudent to change their stance in April to “accommodative” from the current “neutral.”

5. One big reason for the MPC and the RBI’s confidence to sound dovish could be the sharp fall in food inflation. Food CPI, which ranged between 8% and 11% for 18 months since mid-2023, fell to 6% in January and has fallen further to 3.75% in February. This is a multi-year low. Opinion is divided as to its future trajectory. Some economists point to the softening of the world FAO index and to the fact that after three years of high food inflation, the current dip may also last a couple of years. The current rabi crop is also a record one. However, some economists fear that the excessively hot summer forecast by the IMD this year could push up food prices, especially vegetables. However, for now, it is important to note that all major food items like vegetables, pulses, milk, meat, eggs, and fish are exhibiting low single-digit inflation.

Now, let us turn to the positives on the growth front:

1. January industrial output (IIP) has grown by 5% against the CNBC-TV18 poll estimate of just 3.5% and against an April–December tally of just 4.2%.

2. A big push has come from the manufacturing sector, which has grown by 5.5% in January, versus an April–January tally of 4.2%.

3. All key sectors like capital goods, infrastructure, and consumer durables have grown by over 7% in January. Only consumer non-durables have disappointed.

It is tempting to argue that industrial growth, which has been comatose for the past year, is stirring to life. The ingredients are in place: falling interest rates and tax cuts are likely to spur consumption, while the rise in banking liquidity and rate cuts are likely to lower the cost of capital for the corporate sector. Chances are that the government, which has been diligently increasing its capex spend, will be able to pass the baton to the private sector in the coming months.

Although the forecasts of the NSO (National Statistics Organization) indicate a tough-to-believe 7.6% GDP growth for the current quarter, chances are that, going by current IIP, agriculture growth, and government capex trends, the economy may deliver a near-7% GDP growth this quarter.

The only reason why economists are wary of higher GDP growth next year is the gathering clouds on the external horizon. The higher tariffs announced by the US on Canada, Europe, and China, and the quick retaliatory tariffs announced by these countries, are almost certain to lead to the withdrawal of all capex by businesses globally, which, in turn, will have an impact on India’s exports and on Indian business confidence too.

It’s a pity the world is getting nastier even as our domestic economy pieces are falling into place.

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