Mixed macro releases signal potential pause in monetary policy

Recent economic data in India shows cooling inflation but tepid industrial growth, declining exports, and monetary policy pause. 

The latest set of mid-month macro releases offered contrasting cues for sentiment. On the one hand, the consumer price index (CPI) and wholesale price index (WPI) inflation prints for April 2023 cooled to multi-month lows, even as the industrial growth was tepid and well below expectations, and merchandise exports contracted. Nevertheless, taken together, the data supports a pause in the June 2023 Monetary Policy Review.

Cooling inflation

First, the most welcome news. The headline CPI inflation print softened to an 18-month low of 4.7 percent on a YoY basis in April 2023, cooling below 5.0 percent for the first time since November 2021. The sequential fall of nearly 100 bps in the YoY CPI inflation print in April 2023 was broad-based, distributed across the food and beverages (41 bps), miscellaneous items (24 bps) and fuel and light (22 bps) segments. The correction in the food and beverages inflation, to a 17-month low of 4.2 percent benefited from a favourable base effect. Moreover, April 2023 was marked by above-average rainfall and lower than normal temperatures, which helped to keep prices of some perishables under check. Besides, oils and fats witnessed a deflation of 12.3 percent YoY in the month, mirroring global trends in edible oil prices, even as cereals and products and spices, continued to witness double-digit inflation for the eighth and eleventh consecutive month, respectively.

The core-CPI inflation (CPI excluding food and beverages, fuel and light and petrol and diesel index for vehicles) dipped to 5.7 percent in April 2023 from 6 percent in the previous month, thereby recording its first sub-6 percent reading in 10 months. Within the core-CPI, inflation in the services segment, which accounts for a weight of 23.4 percent in the CPI, dipped below the 5 percent mark after a gap of 10 months. There was a relatively larger step-up in prices of some services in the post-pandemic period, following the reopening in the economy. However, annual changes in the services segment are likely to be of a smaller quantum going ahead, which may lead to some tempering in the core inflation in FY2024.

Further, the WPI inflation declined by 0.9 percent YoY in April 2023, witnessing deflation after a gap of 32 months. Fuel and power (102 bps) and the core-WPI (non-food manufactured products; 77 bps) have accounted for bulk of the disinflation in the headline WPI since May 2022, largely reflecting the moderation in global commodity prices from the peak seen after the Russia-Ukraine conflict started. This augurs well for corporate margins as well.

We expect the deflationary trend in the WPI to continue during May-June 2023, amid the favourable base owing to the spike in global commodity prices following the onset of the Russia-Ukraine conflict. However, this may not necessarily transmit into a meaningfully lower CPI inflation. Firstly, the latter has a substantial weight of services, the prices of which will not be meaningfully impacted by lower commodity prices.

Weather-related risks

Secondly, the sharp rise in temperatures in the last two weeks could cause perishable prices to quickly revert to the seasonally higher levels in the next few weeks; food forms around half of the CPI basket. Moreover, headline inflation would need to cool over an extended period of time, for other categories such as housing to ease off. Overall, ICRA projects the CPI inflation to be range-bound in May-June 2023.

With healthy reservoir levels and the expected normal onset of the monsoon, kharif sowing may well kick off in a timely manner. However, the IMD has cautioned that El Nino conditions may develop in the second half of the monsoon season. Any subsequent deficiency in monsoon rainfall could affect kharif yields and winter sowing, which poses a risk to the CPI inflation trajectory, and would keep the growth expectations in check.

The YoY growth in the Index of Industrial Production (IIP) eased to a lower-than-expected 1.1 percent in March 2023 from the revised 5.8 percent in February 2023, dampened by unseasonal rainfall. A clear disappointment was the de-growth in consumer goods, which reflects the adverse impact of weak exports on manufacturing as well as the continued prioritisation of consumption of services over goods. Based on the early high frequency data for April 2023, ICRA expects the YoY IIP growth to print at sub-2 percent in April 2023. Moreover, domestic growth is expected to remain uneven in FY2024 as well.

Further, India’s non-oil exports contracted by a sharp 11.5 percent YoY in April 2023, led by a sharp fall across most categories, including gems and jewellery, readymade garments, chemicals, engineering goods, etc. A slowdown in global demand as well as lower commodity prices are expected to compress India’s merchandise exports in FY2024.

Taken together, the macro data suggests a very high likelihood of a pause from the MPC in its next meeting in June 2023. How long the pause will last, remains cloudy.

Written by Aditi Nayar. Ms. Nayar is Chief Economist and Head – Research and Outreach, ICRA Limited. Views are personal and do not represent the stand of this publication. 

This article was originally published in moneycontrol.