8 mins read . 13 Dec 2022
The latest macro data announced on 12th December is a tale of two diverse set of data points giving diverse outcomes. CPI inflation or consumer inflation fell sharply by 89 basis points to 5.88% for the month of November. At the same time, the Index of Industrial Production (IIP) also dipped into negative at -4.00%for October 2022. Now, falling inflation is a good sign and shows that RBI hawkishness on rates is working. However, falling IIP is not a good sign as it shows manufacturing under pressure. This puts the RBI in a dilemma. Clearly rate hikes are bringing down inflation, but it is also killing growth in manufacturing. It may have to soon decide if it is time to revert to its focus on growth over inflation control.
|Month||CPI Inflation (%)||Food Inflation (%)||Core Inflation (%)|
Data Source: Ministry of Finance Estimates
The above table captures the headline CPI inflation, food inflation and core inflation. Food inflation is a key component of overall inflation and has the highest weightage in the inflation basket. However, core inflation is also material as it reflects the non-food and non-fuel inflation; which normally tends to be a lot stickier and harder to control. Clearly, the inflation trend is headed lower and that has been driven by food inflation. However, higher core inflation in November is a concern at a policy level.
Here is what we read from the inflation data overall, for the month of November 2022.
Is 5.88% consumer inflation good enough for RBI to stop its rate hike saga. Remember, repo rates are now already 110 bps above the pre-COVID levels. However, RBI will not look at the inflation number in isolation but in conjunction with the IIP growth data. We shall now turn to the Index of Industrial Production (IIP) story.
The IIP for October 2022 (IIP is announced with 1-month lag) dipped to -4.0%. This is the second time in the last 3 months that IIP has been negative. Check the table.
|Month||IIP growth (%)|
Data Source: MOSPI
Here are some of the key takeaways from the IIP data for October 2022.
Where does the RBI go from here? Clearly, the message is that the series of rate hikes have brought down inflation but have also depressed growth. As MPC members like Ashima Goyal and Jayanth Varma have been suggesting, it is time for the RBI to look beyond inflation control and focus on growth. After all, if India has to remain the fastest growing large economy in the world with a 400 bps lead over China, then ample liquidity and low rates are essential. It is time for rethink at the RBI.