Inflation Flatters But IIP Growth Falters

  • 30 Jul 2023
  • Read 8 mins read

Rate hikes are bringing down inflation

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.  


Consumer inflation flatters at 5.88% for November 2022 

MonthCPI 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.

Key takeaways from the retail inflation story – November 2022

Here is what we read from the inflation data overall, for the month of November 2022.

  1. CPI inflation for the month of November 2022 at 5.88% was sharply lower than the Bloomberg consensus estimates of 6.32% and the Reuters consensus estimate of 6.40%. November 2022 marks the 38th month that inflation has been above the median target of 4%, but is the first time in 6 months that the inflation is below the peak rate of 6%.
  2. One can argue that from the peak of April 2022 at 7.79%, consumer inflation is down just 191 bps while WPI inflation is down over 800 bps. However, that is like comparing apples and oranges. WPI inflation is normally more sensitive. Also, WPI is a lead indicator, so consumer inflation should follow with a lag.
  3. One concern in the inflation story is the persistent rise in rural inflation. For instance, out of inflation of 5.88% for November 2022, rural inflation was 6.09% while urban inflation was just 5.68%. Food inflation stood at 4.67%, but then rural food inflation was 5.22% while urban food inflation was lower at 3.69%. It is hitting purchasing power.
  4. Food basket is one of the most important components of consumer inflation. One of the biggest drivers of lower food inflation in the latest month is the sharp fall in vegetables inflation to -8.08%. Vegetables have a high weightage in the food basket. However, cereals inflation surged to 12.96% due to lower acreage amidst erratic monsoons.

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.  

IIP falters to -4.0% for October 2022  

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.  

MonthIIP growth (%)

Data Source: MOSPI

Here are some of the key takeaways from the IIP data for October 2022.

  1. There was not much of base effect impact because the October 2021 base IIP growth at 4.17% was almost similar to 4.35% in September 2021. However, in September 2022, the IIP growth was 3.47% while it contracted by -4.0% in October 2022. While growth is robust across mining and electricity, manufacturing bore the brunt.
  2. There were several reasons for the manufacturing slowdown. Russia-Ukraine war is likely to create a full blown energy crisis. Too much hawkishness is threatening a slowdown in the US, UK and the EU. That is hitting consumer sentiments, corporate spending and exports. RBI hawkishness also hit domestic market growth.
  3. How about the break-up of IIP? Mining grew 2.46% and electricity grew 1.20% while manufacturing contracted by -5.65% in October 2022. If you look at FY23 till date, mining grew at 4.0%, manufacturing at 5.0% and electricity at 9.4%. So the pressure is more due to short term momentum being unfavourable.
  4. The sectors that saw negative growth would be of greater interest to understand the crux of the problem. Among key sectoral IIP losers were Apparel (-37.1%), Electrical Equipment (-33.2%), Leather Products (-24.3%), Textiles (-18.6%) and paper (-8.9%). The pressure is clearly coming from the export driven sectors of the economy.
  5. Finally a look at the high frequency IIP growth (MOM) for October 2022. Overall MOM high frequency growth turned negative to -3.28% with negative vibes from electricity and manufacturing. The worry is that the yoy IIP and the MOM IIP have dipped and that is a clear impact of the global and domestic headwinds.

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.