Inflation moderated further to 4.2 per cent, a one year low, in October from 4.3 per cent in September. This was driven by a drop in food inflation to 3.3 per cent (drop of 60 bps) - especially in vegetables, fruits and pulses, while core inflation edged up to 5.1 per cent.
Fuel and light inflation (including petrol and diesel) also picked up 30bps in October, driven by higher petrol and diesel inflation. As expected, we think the positive impact of a favourable monsoon this year is reflecting in lower food prices.
Further, the recent demonetisation measure, we believe, will curb demand and put downward pressures on inflation in the short run. Going ahead, we expect inflation to trend lower and average 4.8 per cent in the second half of fiscal 2017, because of lower consumption due to demonetisation and good monsoons resulting in higher food supply.
Overall, we expect inflation to average 5 per cent in fiscal 2017.
The monetary policy committee (MPC) reduced the policy rate by 25bps to 6.25 per cent at its 4 October meeting. The MPC highlighted that the recent drop in inflation reflects a downward shift in food inflation momentum and opens up space for policy action.
That said, it emphasised that the implementation of the Seventh Pay Commission recommendations, especially the increase in house rent allowance, and the increase in minimum wages due to possible spillovers through minimum support prices, could pose a challenge going ahead.
Overall, the central bank has retained its March 2017 inflation target of 5 per cent - with upside risks that have reduced compared with August.
After two consecutive months of negative growth, IIP was up at 0.7 per cent on-year in September. The improvement was on account of manufacturing sector, which was mildly up at 0.9 per cent in September as opposed to -0.2 per centin August. Electricity sector continued its slow pace of upward movement (2.4 per cent in September over 0.1 per cent in August).
Mining & quarrying sector, however showed continued signs of weakness and restricted the overall upturn in IIP; it registered a growth of -3.1 per cent in September, followed by a -5.8 per cent growth in August.
Within manufacturing, consumer oriented sector led the improvement. It registered a growth of 3.6 per cent in September, compared to -1.2 per cent in August.
Investment related sectors, on the other hand, displayed poor performance (-0.8 per cent growth in September compared to 0.5 per cent in August). The normal monsoons, which should improve rural demand, along with the lagged impact of interest rate reductions, salary revisions and easier monetary conditions are expected to support demand in future and boost industrial activity.
There may be short term disruptions on account of government's demonetisation move as it impacts the cash based transactions, which are a large part of the Indian economy.