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TREASURY RESEARCH 14 May 2024

Data alert: Inflation steady; IIP growth moderates

CPI headline inflation remained largely unchanged at 4.83% YoY in Apr-24 (vs. 4.85% in Mar-24 and HDFC
Bank expectations of 4.9%). Pressure from elevated food inflation was offset by a moderation in core inflation and
a decline in fuel inflation.

Going forward, food inflation momentum is expected to pick-up over the next 2-3 months in line with the seasonal
trend. Vegetable prices tend to rise during the summer months. In addition, this time, prolonged heatwaves pose a
further upside risk to food inflation. We expect inflation to rise to around 5-5.1% in May-24 largely led by higher
food inflation, which is expected to remain above 8% in May-24. However, there could be some relief on food prices
during Q2 FY25. A favourable monsoon (IMD’s forecast of 6% surplus rainfall) in the upcoming south-west
monsoon season is likely to support a moderation in food prices.

CPI Inflation Forecast: Headline inflation is expected to move below 4% in Q2 FY25, majorly led by a high base
effect, and rise thereafter to 5.0% and 4.8% in Q3 and Q4 FY25, respectively. For the full year, headline inflation
is expected to average at 4.6%, food inflation at 5.8% and core inflation at 4.3%.

Policy Outlook: We expect the RBI to maintain a status quo on both rates and stance at its next policy
meeting due in June 2024. We continue to expect 25-50bps of rate cuts cumulatively in FY25, beginning
in Q3 FY25.

Bond Outlook: India 10-year yield (7.18% coupon rate) closed lower by 1 bps at 7.12% yesterday.
Domestic inflation print is unlikely to have a major impact on yields as the print was largely in line with
market expectations. Next trigger for domestic bonds is likely to be the US CPI inflation, which is due on
Wednesday. Any upside surprise in US CPI print could move market expectations towards “higher for
longer” on rates (currently the market is pricing 2 rate cuts of a total of 50 bps in 2024, beginning Sep-24) and
lead to a rise in US yields (above 4.6%). This in turn could weigh on domestic yields. We expect the
domestic 10-year yield to trade in the range of 7.10-7.17% in the near-term

Key takeaways:

• On a sequential basis, headline inflation rose by 0.48% mom in Apr-24 vs. 0% in Mar-24. CPI
excluding vegetable prices stood at 3.6% YoY in Apr-24.

• Food Inflation: Food inflation rose to 8.7% in Apr-24 from 8.5% in Mar-24 led largely by vegetables
(27.8%) and pulses inflation (16.8%). On the other hand, edible oil prices remained in the contraction
zone for the fifteenth straight month. On a sequential basis, food inflation rose by 0.74% mom in Apr-
24 as compared to seasonal average of 1.6% of last 5 years.

• Fuel inflation continued to remain in the negative territory for the eighth consecutive month,
contacting by 4.24% YoY in Apr-24 as compared to -3.4% in Mar-24, led by a contraction in LPG
inflation.

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• Core inflation: Core inflation (excluding food and fuel) moderated to 3.25% in Apr-24 from 3.3% in
Mar-24 with broad-based moderation across sub-categories barring “personal care and effect”, which
rose to 7.45% YoY in Apr-24 reflecting higher gold prices. On a sequential basis, core inflation rose to
0.48% mom in Apr-24 as compared to 0.22% in Mar-24.

CPI Internals (%YoY)

Source: CEIC, HDFC Bank

CPI Inflation trajectory – HDFC Bank expectations

CPI Inflation (%YoY)

8
HDFC Bank Forecast
RBI's upper band 6% 7.4
7 6.8 H
6.4
6 5.7
4.83 5.1
5 5.0 5.1 4.9 4.9
4.9
4.85
4.3
4
3.4
3 RBI's median target 4%
2.9
Base effect
2

0
Jul/23

Jul/24
Jan/23

Jan/24

Jan/25
Dec/23

Dec/24
Jun/23

Jun/24
Aug/23

Aug/24
May/23

May/24
Oct/23

Oct/24
Nov/23

Nov/24
Apr/23

Apr/24
Feb/23

Sep/23

Feb/24

Sep/24

Feb/25
Mar/23

Mar/24

Mar/25

Source: CEIC, HDFC Bank

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IIP growth slowed to 4.9% in March

In line with expectations, IIP growth slowed to 4.9% in March from 5.6% in February. (HDFC Estimate: 4.7%).
This was majorly driven by a sharp moderation in growth in the mining sector. In March-24, mining output growth
slowed to 1.2% from 8.1% earlier.

On a FY basis, IIP growth averaged at 5.93% in FY24 vs. 5.52% in FY23.

Taking cues from the incoming data (Diesel consumption, Manufacturing PMI and E-Way bills) and seasonal
pattern, we expect industrial output growth to slow down further in April-24.

• Sequential decline: The YoY expansion of 4.9% in the IIP during March was in part supported by a
low base during the last year (IIP grew by 1.9% in Mar-23). Although, on a seasonally adjusted
sequential basis, industrial output fell by 1.0% in March. This compares to an expansion of 1.2% in
Feb-24.
• Mining sector offset the pickup in manufacturing: In Mar-24, a slowdown in mining sector
production negated the improvement in manufacturing and electricity production. A part of the
divergence in their March performance could be explained by base effects. While a low base during
the last year pulled up manufacturing and electricity output growth, a high base weighed on mining
production growth in Mar-24.

• Signs of robust infra spending: With some likely support from year end government spending,
capital goods output grew by 6.1% in March vs. 1.0% earlier. Similarly, infrastructure & construction
output expanded by a solid 6.9% vs. 8.5% in Feb-24.

• Divergence in the consumer segment continues: The performance of consumer segment output was
also influenced by a low base during the last year. Although, there was a divergence between the
output growth of consumer durables and consumer non-durables. In March, consumer non-durables
output bounced back and expanded by 4.9%. In comparison, consumer durables output growth
slowed to 9.5% from double digit expansion recorded in Jan-Feb.

IIP growth slowed in March-24

YoY,% Feb-23 Mar-23 Nov-23 Dec-23 Jan-24 Feb-24 Mar-24
IIP 6.0 1.9 2.5 4.4 4.1 5.6 4.9
Industry Wise
Mining 4.8 6.8 7.0 5.2 5.9 8.1 1.2
Manufacturing 5.9 1.5 1.3 4.6 3.6 4.9 5.2
Electricity 8.2 -1.6 5.8 1.2 5.6 7.5 8.6
Good Wise
Primary Goods 7.0 3.3 8.4 4.8 2.9 5.9 2.5
Capital goods 11.0 10.0 -1.1 3.7 3.4 1.0 6.1
Intermediate goods 1.0 1.8 3.4 3.7 5.3 8.7 5.1
Infra goods 9.0 7.2 1.5 5.5 5.5 8.5 6.9
Consumer durables -4.1 -8.0 -4.8 5.2 11.9 12.4 9.5
Consumer non durables 12.5 -1.9 -3.4 3.0 -0.2 -3.5 4.9
Source: CEIC, HDFC Bank

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Treasury Economics Research Team

Abheek Barua Chief Economist abheek.barua@hdfcbank.com +91 (0) 124-4664305

Sakshi Gupta Principal Economist sakshi.gupta3@hdfcbank.com +91 (0) 124-4664338
Mayank Jha Senior Economist mayank.jha1@hdfcbank.com +91 (0) 124-4664354
Swati Arora Economist Swati.arora1@hdfcbank.com +91 (0) 124-4664354
Avni Jain Economist avni.jain@hdfcbank.com +91 (0) 124-4664354

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transact. Such an offer would be subject to contractual confirmations, satisfactory documentation and prevailing market
conditions. Reasonable care has been taken to prepare this document. HDFC Bank and its employees do not accept any
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