Government data released a few days ago showed that inflation had fallen to a three-month low of 6.77 per cent in October. Prior to that, inflation stood at 7.04 per cent in the second quarter (July-September), down from 7.28 per cent in the first quarter (April-June).
While this trend would suggest that perhaps inflation has peaked, it needs to be pointed out that this is the 10th straight month that inflation has remained above the upper threshold of the Reserve Bank of India’s (RBI’s) inflation targeting framework. The RBI is mandated to keep inflation at 4 per cent (plus/minus 2 per cent).
Reserve Bank Governor Shaktikanta Das will hold a meeting with CEOs of public sector banks on Wednesday to discuss issues concerning slow deposit growth and sustainability of high credit demand.
As per the Reserve Bank of India (RBI) data, deposits rose by 9.6 per cent as compared to 10.2 per cent on a year-on-year basis, while credit offtake witnessed a jump of 17.9 per cent as against 6.5 per cent a year ago.
Headline retail inflation likely dropped sharply in October, the first month after the Reserve Bank of India (RBI) failed to meet its inflation mandate, but stayed above the central bank's 6 percent upper bound for the tenth month in a row.
According to a Moneycontrol poll of 16 economists, Consumer Price Index (CPI) inflation is expected to have fallen to 6.7 percent in October from 7.41 percent in September, thanks to a favourable base effect.
The Ministry of Statistics and Programme Implementation will release retail inflation data for October at 5.30 pm on November 14 but before that, it will release the industrial production data for September on November 11.
IIP growth
Industrial growth, as measured by the Index of Industrial Production (IIP), is seen rising to 2.3 percent in September from August's 18-month low of -0.8 percent, according to the median of estimates of 14 economists polled by Moneycontrol.
| ORGANISATION | ESTIMATE FOR SEPTEMBER IIP GROWTH |
| Standard Chartered Bank | 0.7% |
| IDFC First Bank | 1.0% |
| Kotak Mahindra Bank | 1.7% |
| CareEdge | 1.8% |
| State Bank of India | 1.8% |
| YES Bank | 1.9% |
| Sunidhi Securities | 2.2% |
| Bank of America Securities | 2.4% |
| HDFC Bank | 3.2% |
| Deutsche Bank | 3.5% |
| L&T Financial Services | 4.2% |
| Motilal Oswal Financial Services | 4.3% |
| Bank of Baroda | 4.7% |
| ICRA | 5.1% |
Data released on October 31 showed growth in India's eight core industries surged to 7.9 percent in September, up from 4.1 percent in August.
The performance of the core industries is key to industrial growth as they make up around 40 percent of the IIP.
"Many product groups across the manufacturing sector expected a noticeable improvement in the festival season that starts from Onam, covers Durga Puja, and ends with Diwali. It needs to be seen whether this momentum would sustain beyond the festive cheer," added Rupa Rege Nitsure, group chief economist at L&T Financial Services.
Inflation fall
While industrial output is seen rising in September, inflation is expected to have fallen by more than half-a-percentage point in October.
At 6.7 percent, economists' prediction for last month's inflation print would be the lowest since February, though inflation clocked in at 6.71 percent in July.
| ORGANISATION | ESTIMATE FOR OCTOBER CPI INFLATION |
| Barclays | 6.5% |
| Societe Generale | 6.5% |
| Standard Chartered Bank | 6.6% |
| Sunidhi Securities | 6.62% |
| IDFC First Bank | 6.65% |
| Kotak Mahindra Bank | 6.66% |
| HDFC Bank | 6.68% |
| ICRA | 6.7% |
| CareEdge | 6.7% |
| State Bank of India | 6.71% |
| Bank of Baroda | 6.8% |
| Bank of America Securities | 6.8% |
| Deutsche Bank | 6.8% |
| YES Bank | 6.83% |
| L&T Financial Services | 6.88% |
| Motilal Oswal Financial Services | 7.1% |
In October 2021, the base period for the forthcoming inflation number, the general index of the CPI jumped 1.4 percent month-on-month. Meanwhile, the index has increased, on average, by 0.5 percent month-on-month in each of the last four months. As such, a similar increase in the index last month will see inflation fall to 6.5 percent.
While inflation is set to decline, economists say the sequential price momentum continued in October.
"While food inflation is likely to moderate due to base effects, food prices still rose sequentially due to a spike in perishables such as vegetables, fruits and milk," noted Rahul Bajoria, chief India economist at Barclays.
Of the 22 food items for which the Department of Consumer Affairs compiles data, 15 saw a month-on-month increase in prices. This includes a 12 percent rise in the prices of tomatoes, a 7.6 percent rise in onion prices, and a 1.5 percent increase in milk prices.
According to Bajoria, food and beverage inflation likely eased to 6.7 percent in October from 8.41 percent in September.
Uncomfortably high
While headline retail inflation has come off appreciably from the near eight-year high of 7.79 percent in April, it remains uncomfortably high.
October will mark the entry of CPI inflation into a fourth year above the RBI's medium-term target of 4 percent. The last time inflation was under 4 percent was in September 2019, when it had come in at 3.99 percent.
It will also be the tenth straight month in which it will be outside the central bank's mandated 2-6 percent tolerance range. With the RBI's failure confirmed by the September inflation number of 7.41 percent, the Monetary Policy Committee (MPC) met last week to discuss the report the central must submit to the government.
A second successive failure of the RBI, which would occur if average CPI inflation is outside the 2-6 percent band in the next three quarters till April-June 2023, is, however, unlikely.
The RBI's latest forecast says inflation will average 6.5 percent in October-December 2022 and 5.8 percent in January-March 2023 before easing to 5.2 percent in FY24.
"…if the current trend persists, then CPI inflation is likely to average higher than RBI's forecast of 6.5 percent average for October-December 2022," noted Kaushik Das, Deutsche Bank's chief economist for India.
Das sees CPI inflation averaging 6.9 percent in both, the third quarter of FY23 and FY23, before easing to 5.5 percent in FY24.
In an effort to lower costs, the European Central Bank confirmed more rate increases in the upcoming months. Last week, the ECB made the decision to increase interest rates by 75 basis points for the second time in a row. The chance of a recession in the euro zone has increased, according to ECB President Christine Lagarde, who spoke at a press conference.
However, there are certain euro-zone countries where inflation increased by more than 20%, such as Estonia, Latvia, and Lithuania.
In an effort to lower costs, the European Central Bank confirmed more rate increases in the upcoming months. Last week, the ECB made the decision to increase interest rates by 75 basis points for the second time in a row. The chance of a recession in the euro zone has increased, according to ECB President Christine Lagarde, who spoke at a press conference.
