CPI:
The CPI inflation moderated to 5.5% in November from 6.2% in October. Vegetable inflation that has been a culprit in the last few months, moderated to 29% in November from a high of 42% in the previous month. Just by excluding vegetables, CPI inflation stands at 3.9%, below the RBI’s lower threshold of 4%. Encouragingly, the inflation rate for pulses moderated to below 6% in November; however, inflation for edible oils has risen into double-digit territory. Meanwhile, core inflation continues to remain subdued, staying below the 4% mark over the past one year.
The outlook for agriculture remains positive, with good Kharif production. Prospects for Rabi sowing also remain conducive with healthy reservoir levels and good soil moisture from prolonged monsoons. As a result, inflationary pressures within the food basket should ease in the coming months. However, given our import dependence for edible oil, it would be crucial to monitor inflation in this category amidst high global prices and the recent hike in import duty on this item. Inflation in global edible oil has averaged ~13% YoY over the past six months.
Subdued global commodity prices amid concerns over global demand should further support the moderation of headline inflation going forward. In November, the Bloomberg commodity price index declined by 4.7% YoY, and Brent crude prices fell by 9.4% YoY. However, it is crucial to monitor geopolitical developments closely, as these could significantly influence global commodity markets and supply chains.
Expected moderation in inflation in coming months, will allow the MPC to consider a policy rate cut amid slowing growth. We anticipate that headline inflation will fall below 5% by Q4 FY25, driven by a moderation in food inflation. This would create an opportunity for the MPC to consider a 25-bps reduction in policy rates in the February meeting. In total we expect 50-75 bps rate cut in 2025.
IIP:
As expected, IIP grew by 3.5% in October from last month’s 3.1%, driven by a broad-based improvement across the mining, manufacturing and electricity sectors. While the performance in consumer durables segment has remained healthy in the year so far, the encouraging aspect is the improvement in output of consumer non-durables seen in the last two months. This reiterates the fact that there have been signs of continued improvement in rural demand. Healthy agricultural production is expected to be supportive for the consumption scenario going forward. However, we need to remain watchful of the trends in urban demand, especially considering some signs of slowdown. The infrastructure and capital goods output has performed well in the year so far. These segments could benefit from the expected increase in public expenditure over the coming quarters. Overall, the likely pick-up in public capex remains positives for the industrial activity. However, challenges from slowdown in urban demand, elevated inflation and global uncertainties must be navigated.
