Analysts heave sigh of relief as inflation falls below RBI’s 6%-mark; says IIP contraction bigger cause of concern

The retail inflation for November cools-down below the Reserve Bank of India’s upper tolerance level at 5.88 per cent for the first time in 11 months. In this regard, several analysts believe the fall in headline inflation in the previous mainly due to an easing in food and beverage prices.

Similarly, Finance Ministry on Monday said that steps taken by the government have helped in bringing down the inflation to the RBI's tolerance level of below 6 per cent. The ministry in a series of tweets expressed confidence that prices of cereals, pulses, and edible oils will soften, going forward.

On the contrary, the Index of Industrial Production contracted by 4 per cent in October, which according to analysts is concerning.

Also Read: Retail inflation falls to 11-month low of 5.88% in November; Industrial production contracts 4% in October

Raghvendra Nath, MD– Ladderup Wealth Management said, “While the CPI (Consumer Price Index) inflation has beaten market expectations by being lower than forecast, the fall in IIP is a bigger cause for concern as it could indicate poor demand offtake leading to slower GDP (Gross Domestic Product) growth in the coming quarters.

“We should observe the trend of both CPI and IIP over the next few months to get clear signals,” the market analyst said in his comment on the inflation and industrial production numbers.

Meanwhile, Mohit Ralhan CEO of TIW Capital said that the easing of CPI inflation is significant along with the fact that the inflation in food and beverages has now declined to 5.07 per cent and it is now below the upper tolerance band of 6 per cent.

Also Read: RBI Monetary Policy Review MPC Meeting: Central bank keeps CPI inflation forecast for FY23 unchanged at 6.7%

Although RBI is likely to look at the consistency of inflation remaining below 6 per cent, it may be forced to take a harder look on the economy front given the contraction of 4 per cent in IIP for the month of November, Ralhan said in his comment on the CPI and IIP data release earlier today.

According to TIW Capital CEO, “This is a critical time in the RBI policy frameworks and the data for the month of December will be very keenly watched. RBI may still want to go through one instance of a policy rate hike and then take a breather if Inflation continues to remain below 6 per cent.”

“We still need to go through the next few months very cautiously but till now RBI (Reserve Bank of India) has managed the growth-inflation conundrum quite remarkably,” the market expert noted.

The headline inflation rate based on the retail Consumer Price Index (CPI) recorded a drop from 6.77 per cent in October to 5.88 per cent in November, which is an 11-month low. The drastic decline in retail inflation is mainly due to a sharp decrease in food price inflation, the finance ministry said.

The retail inflation based on Consumer Price Index (CPI) has remained above 6 per cent since January 2022. The six-member MPC headed by Governor Shaktikanta Das factors in retail inflation while deciding the bi-monthly monetary policy.

Since May, the RBI has raised the short-term lending rate (repo) by 2.25 basis points, taking it to 6.25 per cent.