Retail inflation at 5mth high; factory output contracts

RATES ON HOLD? Increase in CPI inflation erases hope of a rate cut soon; Fall in IIP removes chances of a hike as well

NEWDELHI: India’s retail inflation rose to a five-month high of 3.85% in March on the back of higher fuel prices, erasing any hope of a rate cut by the central bank in near future.

Factory output surprisingly contracted 1.2% in February leaving economists perplexed, but also ensuring that the Reserve Bank of India won’t take up the policy rate.

Crisil chief economist DK Joshi said though inflation remains within the comfort zone of the Reserve Bank of India, there is a risk that it could rise.

In its monetary policy review on April 6, RBI pointed to uncertainty about the outcome of the south west monsoon in view of the rising probability of an El Niño event around July-August. It added that things could go the other way, citing the projection of record production of foodgrains that could rebuild buffer stocks and mitigate food price stress.

The surprise part of Tuesday’s data release by the government was factory output, as measured by the Index of Industrial Production (IIP) .

On paper, this was on account of the poor performance of the manufacturing and capital goods sectors, but Crisil’s Joshi warned against reading “too much into it”. “There is huge amount of volatility in the IIP. There is more noise than signal of economic significance in IIP now,” he said, adding that it doesn’t ‘capture ground realities.”

After the Centre’s announcement of withdrawal of high-value currencies on November 8, IIP contracted in December but picked up in January.

A Reuters poll of economists had projected IIP at 1.3% in Feb- ruary and retail inflation at 3.98% for March.

A Business Outlook Survey by the Confederation of Indian Industry (CII) released on Sunday was bullish about economic recovery while another survey by the Federation of Indian Chambers of Commerce and Industry (Ficci) released on Tuesday was less sanguine.

Ficci president Pankaj Patel said in a statement that the fall in the growth of the manufacturing sector growth is in line with the outlook for the sector as perceived by Ficci’s latest manufacturing survey for the fourth quarter.

“It only indicates that the growth remains fragile in manufacturing and (the) need (for) continued efforts to make the sector competitive. Government should continue its reform measures to strengthen the sector.”