The Reserve Bank of India passed on raising rates the last time it met, and it will face a tough decision at its next meeting on December 5. Coming into this week, most expected that the RBI would raise rates at its December meeting, but declining oil prices could ease inflation in November, keeping the RBI on the sidelines again. Consumer inflation for October was weaker than expected, but industrial output was robust, which could force the central banks hand.

Consumer Price Inflation Was Softer than Expected

Indian CPI came in at 3.3% in October which was softer than the 3.6% expected by economists and compares to the 3.7% increase in CPI seen in September. The softer than expected number was driven by a decline in good inflation which declined by 0.86% in October which compares to the 0.51% increase seen in September. Fuel inflation increased slightly to 8.55% compared to 8.47% in September, but a 20% drop in crude oil prices in November will likely ease fuel inflation. Housing inflation also slipped dropping to 6.5% in October compared to a 7.1% rise in September. Clothing which includes footwear dipped increasing by 3.5% compared to 4.6% in September. Core inflation which excludes food and energy came in at 6.1% year over year.
Currently the 3.3% increase in headline inflation is below trend which is approximately 4%, and the current target of the India Monetary Policy Committee. If inflation continues to track these levels it will be hard for the RBI to raise rates with below trend inflation.

Additionally, rural inflation negatively accelerating faster than urban inflation, which could point to weakness in rural demand. Rural inflation fell sharply to 2.8% compared to 3.3% in the previous month. You can follow India’s consumer price inflation on a reputable forex trading app.

Indian Industrial Production Was Stronger Than Expected

Indian Industrial production was stronger than expected with output rising more in September despite a decline in the Rupee. This IP lags, which means that higher fuel prices increased costs and weighed on IP. The decline in oil prices in November will buoy output.

India reported that the index of Industrial Production increased by 4.5% in September on a year over year basis. This compared to a 4.1% increase in September of 2017. Expectations were for a 4.3% increase in IP in September. The August industrial production number was revised higher to 4.7% compared to the prior release which showed a 4.3% increase. Mining output, which is also incorporated into the Industrial production number increased by 0.2% year over year compared to a robust 7.6% increase in September of 2017. Manufacturing output increased by 4.6% compared with last year’s growth of 3.8%. Electricity generation growth stood at 8.2% compared with a 3.4% rise last year.

The combination of the stronger output and lower inflation is a recipe that is perfect for long term growth. The question for the RBI is whether stronger output will lead to higher inflation level, and push the central bank behind the curve.