Retail inflation breaches RBI’s tolerance level, but factory output up

India’s retail inflation rose to a two-year high of 6.07% in July, driven by soaring food prices and breaching the RBI’s tolerable threshold, while factory output grew at 2.1% in June, latest data released on Friday showed. A high inflation rate will likely weaken the chances of an interest rate cut in the RBI’s policy review in October.

The RBI and the government have set a new retail inflation target of 4% for the next five years with an upper tolerance level of 6% and lower limit of 2%.

This week, RBI governor Raghuram Rajan kept interest rates unchanged during his last monetary policy review.

Retail inflation was 5.77% in June and 3.69% in July last year.

Consumer food price inflation, a metric to measure changes in household kitchen budgets, grew 8.35% in July, from 7.79% in June. Pulses, a common source of protein for Indians, grew 27.75% in July, compared to 26.86% in June.

“We expect retail inflation to average at 5% in 2016-17, assuming a normal monsoon and proactive food supply,” Crisil said in a report. “A normal monsoon will soften food inflation.”

Factory output, measured by the index of industrial production (IIP), grew at 2.1% June, from 1.1% in the previous month. The manufacturing sector, which accounts for two-thirds of the IIP, grew at 0.9% during the month. Capital goods output, which serves as a gauge for additional investment activity, contracted (-)16.5% in June, from a decline of (-)12.3% in May, mirroring muted capacity additions.

India’s merchandise exports contracted 6.84% in July due to a decline in shipments of engineering goods and petroleum products. The value of overseas shipments had risen for the first time in June, after falling for 18 consecutive months.