Retail inflation at 10-month high, but within target

India's retail inflation rate spiked to a 10-month high of 3.21% in August on the back of high food prices but still remained below the central bank's medium-term target, keeping the door open for another rate cut next month.

Retail food prices moved up to 2.99% from 2.36% in July, the official data released on Thursday showed. industrial output growth, however, rebounded in July and printed at 4.3% from a low of 1.2% in June.

Analysts, however, said that the growth trend in IIP could be short-lived as all high-frequency data such as automobile sales and core sector growth did not point to any recovery.

Core inflation, which excludes food and oil, remained less than 5% indicating, economic demand remained muted as slowdown persisted. Confirming to the trend, a separate government data released on Thursday, showed India's oil consumption in August remained lowest in nine months since November last year.

While inflation in meat and fish basket was 8.51%, it was 6.9% for vegetables. In health, it was 7.84% and education segment 6.10%.

With the CPI inflation recording only a mild increase in August 2019 despite the sharp uptick in the food inflation, we continue to expect the MPC to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth.

While the late surge in monsoon rains has narrowed the YoY gap in Kharif sowing to a mild 0.6% as on September 6, 2019, the flooding in certain areas has led to a continued rise in the prices of vegetables such as onions. This, in conjunction with an unfavourable base effect, is likely to contribute to a hardening of food inflation in the ongoing month, Aditi Nayar, Principal Economist at Care Rating said.

In all, 13 out of 23 industry groups in the manufacturing sector shows positive growth, the government data showed.

The manufacturing sector output rose 4.2% in July and the mining sector improved to 4.9%. On the other hand, electricity generation growth moderated to a four-month low of 4.8%.

“While the IIP growth recorded an improvement in July 2019 relative to the previous month, this trend is likely to be short-lived. Early data reveals a contraction in the output of Coal India Limited and automobiles, as well as electricity generation in August 2019, suggesting that the next IIP print is likely to be muted,” Care Rating said in a statement.