Inflation quickens, IIP sees mild recovery
RBI unlikely to cut rates in its October 4 credit policy review due to weak GDP, IIP growth: Analysts
India’s retail inflation quickened in August to a fivemonth high, virtually ruling out another rate cut by the Reserve Bank of India (RBI) in next month’s monetary policy review, while factory output recovered mildly as companies continued to absorb the disruption caused by the introduction of goods and services tax (GST).
Data released by the Central Statistics Office showed retail inflation continued to accelerate for the second consecutive month, increasing to 3.36% in August from 2.36% a month ago, as food inflation turned positive (1.52%) after three months of contraction; fruits and vegetables prices jumped by 5.29% and 6.16% respectively in July.
Sunil Sinha, principal economist at India Ratings Ltd said despite the dismal first quarter (April-June) GDP growth and continuous weak IIP growth numbers, the central bank is unlikely to cut rates in its October 4 monetary policy review. “Though both consumption and investment demand are weak, fiscal and monetary space is limited and therefore the pick-up in growth is going to be a slow and drawn out process notwithstanding the encouraging first month GST collections.”
Index of Industrial Production (IIP) grew at 1.2% in July from a contraction of 0.2% a month ago. While manufacturing sector was almost stagnant growing by 0.1%, mining and electricity sectors grew at robust 4.8% and 6.5% respectively in July.
In terms of industries, 15 out of 23 industry groups in the manufacturing sector saw contraction in production during July signalling weakness in the sector.
Aditi Nayar, principal economist, ICRA Ltd said the pace of IIP growth is weaker than expected. “Given the favourable base effect and the expected rebuilding of inventories prior to the festive season, we expect the IIP growth to improve in August.”
While digestive enzymes, electricity, mining, HR coils and sheets of mild steel and two wheelers were high positive contributors to July IIP, the items that dragged it down includes tobacco products, diesel, bulk drugs, printing machinery and electrical apparatus.
Consumer durables has contracted in all months in all seven months ended July with the exception of May while consumer non-durables continued to register positive growth. Capital goods which represents investment demand continued to remain in negative territory.
India’s economic growth unexpectedly slowed to 5.7% in the June quarter, the slowest pace in three years, underlining the disruption caused by the uncertainty related to the rollout of GST even as the Indian economy is struggling to recover from a shock demonetisation.
RBI, which cut its repo rate by 0.25 percentage points last month, retained its neutral policy stance, citing uncertainty on the future trajectory of inflation because of several uncertainties.
The second volume of the Economic Survey 2016-17 presented in Parliament last month took a contrarian view and maintained that India is undergoing a structural shift toward low inflation, mostly due to changing dynamics in the oil market, which has capped upside risks.