India’s retail inflation rate fell below the 7 per cent mark in August and industrial production accelerated to a five-month high in July, providing some relief to the government on the macroeconomic front ahead of the festival season.
Data released by the National Statistical Office (NSO) on Tuesday showed that the consumer price index (CPI)-based retail inflation eased to 6.83 per cent in August, from a 15 month high of 7.44 per cent in July, on account of moderation in the rate of price increase for vegetables, clothing & footwear, housing and services.
Separately, factory output growth measured in terms of the Index of Industrial Production (IIP) accelerated to 5.7 per cent in July, from 3.7 per cent in June, driven by robust growth in mining (10.7 per cent), power (8 per cent), and manufacturing (4.6 per cent) sectors.
Reserve Bank of India (RBI) Governor Shaktikanta Das earlier this month said that inflation is likely to remain high in August but is expected to start moderating from September onwards due to the recent fall in food prices, as seasonality in food prices does not last long.
Retail inflation has remained above the central bank’s upper tolerance level of 6 per cent for the second consecutive month in August. The Monetary Policy Committee of the RBI ignored the upside inflation risks last month and unanimously kept the repo rate unchanged at 6.5 per cent.
“We expect the RBI to look through the July-August lift in inflation due to sharp spike in vegetable prices and maintain status quo on rates and stance in the October Policy,” said Crisil Chief Economist D K Joshi.
Food inflation decelerated to 9.94 per cent in August from 11.51 per cent in July, as the vegetable price inflation, which was the primary reason for the massive spike in retail inflation in July, decelerated to 26.1 per cent. While inflation for pulses (13.04 per cent), cereals (11.85 per cent), milk (7.73 per cent) and prepared meals (5.31 per cent) eased in August, the prices of fruits (4.05 per cent), sugar (3.80 per cent), spices (23.2 per cent) and protein-rich items like egg (4.31 per cent) & meat (3.68 per cent) saw acceleration during the same month.
Core inflation (excluding food and fuel components) remained at around 5 per cent in August, as the rate of increase of prices of clothing & footwear (5.15 per cent), housing (4.38 per cent), and services like recreation (3.59 per cent), education (5.46 per cent) and personal care (8.12 per cent) slowed down in August.
Aditi Nayar, chief economist at ICRA, said notwithstanding the reversal of the relatively transient spike in tomato prices, the outlook for food inflation remains on edge, on account of other vegetables like onions, as well as kharif crops with a lag in sowing such as pulses. “Well distributed rainfall in the rest of September could help to protect kharif yields, even as reservoir levels do not portend well for an early kick off of rabi sowing,” she added.
Rajani Sinha, chief economist at CARE Ratings, warned that the recent spike in global crude oil prices is also concerning. “However, a comforting factor is that the continued deflation in WPI (wholesale price index) will have a lagged impact on the CPI-based inflation going forward,” she added.
In the IIP, nine of the 23 manufacturing industries, such as apparel, wood, paper, chemicals and electronics, witnessed contraction in July.
While infrastructure goods (11.4 per cent) registered double-digit growth, capital goods grew at a modest 4.6 per cent. Consumer non-durables (7.4 per cent) saw robust growth, indicating revival in rural demand. However, the consumer durables (-2.7 per cent) sector contracted for the second consecutive month, indicating that higher interest rates may be adversely impacting urban demand.
“The coming months hold clues to the sustenance of growth in industry and will be dependent on consumer goods reviving. High inflation as well as dilution of pent-up demand will come in the way of future growth for sure. The industrial growth number is, however, comforting for the RBI in terms of giving reassurance on the growth front,” said Madan Sabnavis, chief economist, Bank of Baroda.
General and food inflation (% Y-o-Y)
Note: Data for Aug 2023 provisional
IIP Trends: Annual and monthly
Note: Data for July 2023 provisional