Separately released data showed industrial production growth steady at 5.6% in February compared with 5.5% in January, suggesting the economy was holding firm in the face of slowing global demand, and high interest rates.
Economists expect the rates to remain on pause as the central bank tries to gauge the impact on growth while inflation is expected to remain within its target 2-6% range band. The International Monetary Fund on Tuesday pared India’s growth estimate for FY24 to 5.9% from 6.1% estimated earlier. The RBI, however, last week lifted its forecast to 6.5% from 6.4%.
The “growth-inflation dynamics at the current juncture does not warrant further rate hikes in near-term”, said Sunil Sinha, principal economist, India Ratings.
Rajani Sinha, chief economist, CARE Ratings, sees an even longer pause.
“With CPI (Consumer Price Index) inflation expected to moderate in the coming months and an improvement in the household’s inflationary expectation, we do not expect further rate hikes by RBI in FY24,” Sinha said.
Industrial recovery
The next monetary policy committee (MPC) meeting is scheduled for June 6-8.
“We expect the June 2023 MPC decision to be highly data dependent,” said Aditi Nayar, chief economist, ICRA.
In the 11 months beginning May 2022, the RBI raised its key policy rate by a cumulative 2.5 percentage points. In the review last week, the six-member MPC unanimously voted to pause rate increases to gauge the impact of the monetary action so far. Manufacturing and electricity, which rose 5.3% and 8.2% respectively, helped industrial growth remain firm. Mining output was up 4.6%. Within manufacturing, chemicals, auto, machinery and basic metals were drivers of growth.
“The infra spending by the government has provided support. Further, the pent-up demand for automobiles – especially passenger cars and commercial vehicles – has added to the supply of vehicles,” said Madan Sabnavis, chief economist, Bank of Baroda.
Capital goods, a proxy for investment, registered a 10.5% increase in February, but more urban demand-centric consumer durables production continued to contract, shrinking 4% in March from a year earlier.
Consumer non-durables production, an indicator of rural demand, jumped 12.1% in March, while infrastructure/construction goods and primary goods output rose 7.9% and 6.8%, respectively. A global slowdown is expected to weigh on industry though a pick-up in the government’s capital expenditure is expected to provide support.
Inflation outlook
The decline in inflation was driven by the decline in food inflation to 4.79% in March from 5.95% in February. Cereals inflation remained in double digits in March but eased marginally to 15.27% from 16.73% in February. Housing was the only category to rise faster compared with the previous month.
Services inflation slowed to 5.77% in March from 6.12% in February. Core inflation eased slightly to 5.8% in March from 6.1% in February.