Food drives up headline inflation; core dips below 4%

• Inflation based on the Consumer Price Index (CPI) edged up to 5.7% in December from 5.6% in November. Food inflation, accentuated by low-base effect rose to 9.5% from 8.7%. The drivers were vegetables and fruits, and pulses and sugar. Inflation in cereals and spices continues to be elevated.
• On average, we expect the CPI inflation this fiscal to average 5.5% and see some further softening in the next. Easing input cost pressures on manufacturers and moderating domestic demand are expected to keep core inflation in check. That said, several risks to our forecast remain.
• The Index of Industrial Production (IIP) slowed sharply to 2.4% on-year in November from 11.6% in October. Manufacturing IIP slid while electricity and mining orders slowed. As per the use-based classification, production declined on-year in consumer and capital goods, whereas slowed considerably in infrastructure and construction goods.
• Lagged transmission of the RBI’s rate hikes and the central bank’s recent regulatory measures that clamped down on risky lending are expected to somewhat moderate credit growth and domestic demand going forward. Slowing growth in India’s major export markets, especially the United States, is likely to weigh on the export demand in the remainder of this fiscal. These factors indicate slower industrial growth ahead.