Inflation soars, may put off rate cut plan

New Delhi: India’s industrial production grew faster than expected at 1.2 per cent in May due to uptick in consumer durables output. However, retail inflation based on Consumer Price Index (CPI) paced to a 22-month high level of 5.77 per cent in June on back of increase in food prices.

Industrial production had contracted by 1.34 per cent in April. While, industrial production  growth is still anaemic; an increase in retail inflation may tie hands of RBI to cut interest  rates.

The overall food inflation moved up to 7.79 per cent in June from 7.47 per cent in the previous month. Inflation in vegetables was up at 14.74 per cent against 10.77 per cent in May and in cereals and related products was 3.07 per cent compared to 2.59 per cent in the previous month.

However, the rate of price rise in pulses declined to 26.86 per cent during the month while it stood at 31.57 per cent in May. “While the headline CPI inflation remained flat at 5.8 per cent in June 2016, firmer food inflation that partly originated from perishable items which may reverse going forward, conceals an encouraging and broad-based dip in core inflation,” said Aditi Nayar, Senior Economist, ICRA.

She said that  next print for CPI inflation is expected to remain elevated, before a combination of a favourable base effect, progress of monsoon and sowing as well as lower temperatures help to dampen food inflation.

According to data on industrial activity, output of consumer dur-ables grew by 6 per cent in May compared to a contraction of 3.9 per cent in the same month a year ago. The manufacturing sector that constitutes over 75 per cent of the index saw a growth of 0.7 per cent in May compared to 2.1 per cent a year ago. The consumer non-durables output contracted by 2.2 per cent. The overall growth in consumer goods was 1.1 per cent.

“Industrial production experienced a marginal uptick on back of improved performance in the manufacturing sector. However, the industry still remains weak and the data shows that the weakness in investment persists,” said Rishi Shah, economist, Deloitte.

He said in particular capital goods continued to contract for the seventh month highlighting that sentiments on investments picking up still remain weak. “The positive number has essentially been driven by a continued improvement in demand as consumer durables had another impressive showing.

“The decline in consumer non-durables was also lesser and we could see some expansion in the coming months as rural demand picks up on the back of better rains,”  said Mr Shah. According to him, the industrial production is unlikely to see a quick turnaround and “we expect to see low growth numbers going forward.”