As India’s consumer price inflation softened in July, investors are hoping that the Reserve Bank of India’s Monetary Policy Committee will slow upcoming rate increases.  RBI’s Governor Shaktikanta Das said that “there are signs CPI inflation has peaked, and it is expected to moderate going into the fourth quarter of this year (FY23) and the first quarter of next year (FY24).” Consumer price inflation is down below 7% for the first time since April as food prices eased to their lowest level since March.

As food makes up nearly 46% of the consumer price inflation index basket, a cooling of food prices is a positive signal. The primary contributors to lower food inflation in July vis-à-vis June is the fall in prices of meat and fish, and cooking oil. The prices of these items fell 2%-3% in July over June.

Inflation may not have peaked, however. Wholesale price inflation (WPI) continues to be in double digits (13.93%) for the 16^th month in a row. However, WPI dipped below 15% for the first time since April.

The mild cooling in WPI is also due to the fall in prices of primary food articles, primary food products, and cooking oil. These makeup over 26% of the weight in WPI.

The large 7.22 percentage points difference between WPI and CPI shows that producers are not able to pass on the entire burden of rise in cost of production to end consumers. This is likely because companies and manufacturers fear a fall in demand if they pass on the entire cost increase to their customers.

Now that CPI peaked in April and WPI in May, have inflation risks to the economy’s recovery receded? 

Industrial production continues to grow, but slows mildly in June

The index of industrial production (IIP), a barometer of manufacturing activity, showed a healthy growth of 12.3% YoY in June. Although IIP growth in May was nearly 20% YoY, this was on a low base due to local lockdowns across India in 2021 due to the second wave of the pandemic.

This could explain the slowdown in the growth of manufacturing activities YoY in June (12.5%) compared to May (20.6%).  The late start of the monsoon in the rest of India in June led to a drop in electricity consumption in the first two weeks of June. The scorching heat wave during the summer had pushed up power demand, which fell once the monsoon spread across India in June. This led YoY growth in electricity production to slow to 16.4% in June compared to 23.5% in May. The Indian monsoon season usually starts in the last week of  May when it hits Kerala and covers the whole of India by mid-July.

The monsoon also led to a slowdown in mining activity, which grew 12.5% YoY in June compared to 20.6% in May. The imposition of export duty on steel by the Centre in May also impacted the production of basic metals which slowed to a 6.1% growth YoY from 16.3% YoY. Basic metals production accounts for 13% of weight in the IIP.

PMI points to a sustained recovery in July

Although the Q1FY23 results season was a mixed bag according to Trendlyne’s results dashboard, there is evidence that India’s economic recovery is sustaining. The purchasing managers’ index for manufacturing in July was at an eight-month high of 56.4. A PMI reading of above 50 means an expansion in manufacturing activities.

Other signs point to an economic recovery -  auto wholesales rose 10% YoY in July, according to the Society of Indian Automobile Manufacturers. Still, an 8% YoY fall in retail automotive sales points to some speed breakers along the way.

While India is in a better place financially in 2022 compared to 2013, its trade deficit is rising. At the end of July, the trade deficit was at $30 billion with merchandise exports falling to a five-month low of $36.3 billion. India’s FY23 trade deficit for the first four months of the financial year is already at a record high of $100 billion.

Much of the deficit is from expensive imports of crude oil as prices shot up due to the conflict in Europe. The imposition of the export tax on fuel didn’t help either, as Indian exports of petroleum products fell $2.4 billion MoM in July to $7.8 billion.

Investors might have to wait for India’s Q1FY23 GDP numbers at the end of this month to understand where the economy is heading. That will give a clearer picture of the economic recovery