June retail inflation above RBI target; IIP improves

India’s retail inflation eased only marginally in June but stayed above the Reserve Bank of India’s upper tolerance band of 6 per cent for the second month in a row, making it difficult for the central bank to remain growth-focused to aid the Covid-stricken economy.

The government data showed industrial production grew 29.3 per cent in May, mainly due to low-base effect. Industrial production had declined to (-)33 per cent in May 2020 due to Covid-related lockdown. Manufacturing, mining and power sectors too added to the growth of factory output.

Retail inflation, measured by the Consumer Price Index (CPI), came at 6.26 per cent in June, slightly down from 6.30 per cent in the previous month but there was a rise in the food basket mainly due to increasing prices of oils and fats which surged nearly 35 per cent year-on-year in June. Price of eggs, fruits, pulses all rose in June but the vegetable rates came down a bit. Overall food basket rose to 5.15 per cent in June from 5 per cent in May.
Apart from food and beverages, fuel and light segment rose nearly 13 per cent, clothing and footwear was up 6.21 per cent and the housing segment rose nearly 4 per cent. RBI tracks the retail inflation numbers for making monetary policy decisions.

“The individual MPC members may have a varying tolerance for inflation that persists above the 6 per cent target beyond a quarter, during the revival phase. If the CPI inflation remains entrenched above the 6 per cent upper threshold in the next two prints (July-August 2021), an advancement of rate normalisation (by RBI) can’t be ruled out,” said Aditi Nayar, chief economist at ICRA.

Lead economists from Emkay Global Financial Services, however, maintained that the RBI may still choose to look through the spike in inflation in the near term, with the monetary reaction function hinging more on growth revival becoming sustainable.

On industrial production, the data showed that industrial output recovered but was still below the pre-pandemic level in May 2019.

Manufacturing that constitutes more than 77 per cent of the Index grew 34.5 per cent in May while mining output rose over 23 per cent and power increased 7.5 per cent.