Retail inflation at 7-month high, IIP growth surprises

India’s retail inflation surged to a seven-month high of 3.05% in May on the back of costlier food, which comprises nearly half of the country’s inflation basket.

It, however, remained much less than the Reserve Bank of India’s target of 4%, raising hopes of another rate cut by the central bank to give a leg-up to a five-year-low economic growth.

Industrial production growth at 3.4% in April, however, surprised the street as it came after a decline in the past two consecutive months.

Economists said the seasonal uptick in food prices could be sharp going ahead if monsoon played truant. Vegetable prices have already hit the roof in some parts of the country and early trends of sowing in cereals and pulses showed it was 24% less this year.

But a slowing core inflation (non-food, non-fuel) indicated it could keep a lid on the headline numbers, going ahead. Core inflation fell to 4.21% in May or a 22-month low in May and pointed towards extremely weak demand conditions, which can prompt RBI to cut interest rates once again in the August policy review.

A higher inflation print came after RBI lowered its repo rate by 25 basis points to bring it to a nine-year low of 5.75% in its policy review and also changed its stance to “accommodative” to meet the needs of the economy.

Economists said the rest depended on the government on what steps it took to complement an accommodative monetary policy.

State Bank of India economist Soumya Kanti Ghosh said the government should use sector-specific measures to rev up economic growth as consumption demand as such is not showing strong signs of recovery.

SBI released a report on the economy soon after the inflation numbers with a headline “need for some serious repair”.

On the higher industrial growth figures, analysts struck a note of caution.

“It is too early to extrapolate the same for the year as the base effect would be playing a role till October or so when the rates were high last year. The good part is that growth is spread well across mining, manufacturing and electricity,” said Care Rating in its analysis.

In terms of industries, 14 of 23 industry groups in the manufacturing sector recorded growth but IIP numbers have to be treated with caution due to their volatile nature.