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IIP growth indicates steady festive demand and some boost from base effect

IIP growth indicates steady festive demand and some boost from base effect

Lower CPI inflation gives consumers breather; but experts remain cautious on the outlook for retail inflation given the continued high food inflation

Surabhi
Surabhi
  • Updated Oct 12, 2023 6:58 PM IST
IIP growth indicates steady festive demand and some boost from base effectIndustrial activity posted a sharp rebound in August
SUMMARY
  • IIP growth at 14-month high
  • Consumer durables and non-durables expand in August
  • Concerns remain on food inflation, cereals and pulses see price pressures

The festive season is likely to see strong demand, with industrial activity registering double-digit growth in August as well as easing retail inflation in September, giving relief to consumers.

Industrial activity, as measured by the Index of Industrial Production (IIP), posted a sharp rebound in August with 10.3 per cent growth year-on-year, which was a 14-month high. Significantly, the manufacturing sector registered a sharp 9.3 per cent growth, while in the use-based classification, both consumer durables and non-durables witnessed expansion at 5.7 per cent and 9 per cent, respectively.

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Meanwhile, retail inflation, as measured by the consumer price index, eased to 5.02 per cent in September from 6.83 per cent a month ago. This was driven by a sharp decline in vegetable prices and a moderation in fuel prices, but consumer food price inflation remained high at 6.56 per cent in September compared to 9.94 per cent a month ago.

Experts noted that the jump in IIP growth was partly due to the base effect, as it contracted by 0.7% in August 2022.  However, in the backdrop of other high-frequency indicators, it suggests good demand in the festive season.

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Also Read: Retail inflation eases to 5.02% in September, IIP output rises 10.3% in August

“This high growth in IIP corroborates with the buoyant PMIs and GST collections. The next two months should ideally see sustained growth if rural demand revives—this has been a lacuna so far,” said Madan Sabnavis, Chief Economist, Bank of Baroda, while noting that use-based classification shows that durable goods have for the first time registered positive growth, though it comes over -4.4 per cent growth last year. However, one needs to see if such buoyancy gets reflected in the sales of India Inc in their second quarter results, he cautioned. 

“Looking ahead, a shift in the festival calendar may provide an optical boost to the growth of certain categories within the IIP in the months of September and November, with a concomitant moderation in the prints for October,” said Aditi Nayar, Chief Economist, Head - Research and Outreach, ICRA. 

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Experts, however, remained cautious on the outlook for retail inflation given the continued high food inflation, especially in pulses and cereals in September at 16.38 per cent and 10.95 per cent, respectively.  

“Our projections suggest that the headline CPI inflation will remain volatile in a wide range until June 2024, with the outlook for food inflation remaining murky and continuing volatility in crude oil prices. Nevertheless, further monetary tightening is not warranted in the near term, amid the continued lagged transmission of past rate hikes through the economy,” Nayar noted. 

Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research, forecast headline inflation to average 5.6% in FY24 and remain in the range of 4.5-5.5% in the second half of the fiscal. “Nevertheless, we believe that the geo-political risks in the background and the upward pressure on oil prices, apart from the food output risks will keep the RBI Monetary Policy Committee watchful and any reversal of the monetary policy stance is likely to happen only in the next fiscal,” he said. 

 

Published on: Oct 12, 2023 6:57 PM IST
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