India’s IIP Cools in February 2025 — What It Signals for the Rate Cycle Ahead
As expected, the Index of Industrial Production (IIP) posted a softer print of 2.9% in February 2025 compared to 5.0% (Quick Estimate) in January 2025. The moderation aligns with signals from highfrequency indicators. Both core sector output, which accounts for approximately 40% of the IIP, and the Manufacturing PMI, showed softening - laying the groundwork for subdued industrial performance.
Lead Indicators Had Already Set the Tone
The core sector grew by just 2.9% YoY in February 2025, down from stronger prints in the previous months. Simultaneously, the Manufacturing PMI eased to 56.3, reflecting a 14-month low and hinting at weaker output and new orders. Given the historically strong correlation (~0.86) between the core index and IIP, the decline in IIP was already well-anticipated.
What the IIP Decline Means
The cooling of the IIP signals a broader deceleration in manufacturing momentum, indicating that while industrial demand continues to grow, it is doing so at a more measured pace. The moderation, though not alarming, highlights a shift in the industrial recovery curve — one that now calls for sustained policy support to prevent a deeper slowdown. In the backdrop of India’s post-pandemic growth path, where manufacturing and infrastructure are key pillars, maintaining consistent momentum is vital to ensure long-term growth.
RBI Acts Early — and May Have More Room to Ease
Sensing early signs of industrial softening and aided by benign inflation, the Reserve Bank of India (RBI) acted proactively in its April 9, 2025, MPC meeting, cutting the repo rate by 25 basis points to 6%, besides changing the stance to accommodative, reflecting its intent to support growth while inflation remains contained. With CPI inflation at 3.61% and forward-looking indicators like a favorable monsoon outlook, strong Rabi crop, and easing crude oil prices, the macro environment presents a disinflationary backdrop. These conditions create room for further rate softening should growth remain fragile in the months ahead and no major global disturbance.
RBI’s Balancing Act Amid Global Uncertainties
Despite domestic macroeconomic comfort, the RBI is likely to tread cautiously, given the resurgence of global trade tensions and the evolving tariff war scenario. These external shocks can create volatility in commodity prices, disrupt supply chains, and influence capital flows — all of which demand prudence in policymaking.