Retail inflation spikes in June

In more bad news for the economy, India’s retail inflation rose to an eight-month high of 3.18% in June on the back of higher food prices, while industrial output slowed to 3.1% in May.

The double trouble may prompt the Reserve Bank of India to cut the key interest rate one more time in its August 7 monetary policy review.

Vegetable prices firmed up due to seasonal factors and a rise in transport costs. During the monsoon period, vegetable prices generally go up but the recent hike in taxes and cess on diesel in the Union budget may keep the rates of vegetables and food commodities on the higher side in the coming months.

Prices of items like eggs, meat and fish as also pulses and edible oil were high in June. But what should worry the policy makers more was a decline in core inflation, which fell to 4.25% in May and 4.11% in June, indicating demand for consumer goods too was falling fast.

On the industrial output side, 11 out of 23 industry groups in manufacturing sector performed negatively. Factory output growth was weighed down by weakness in capital goods and consumer durable goods production.

Capital goods output, a barometer of investment, grew at 0.8% in May compared to 6.4% in the same month last year. Similarly, the growth in the manufacturing sector was at 2.5% in May, compared to 3.6% last year, official data showed.

“This is not a good situation for the economy, with core inflation declining, reflecting weaker demand conditions at a time when industrial growth is barely picking up. Inflation remaining below 4% for an 11th consecutive month is good news for the RBI - odds are in favour of a 25bps rate cut,” said Devendra Pant, Chief Economist of India Ratings.

However, he said a rate cut was unlikely to spur growth significantly in the short to medium term.

Last week, RBI Governor Shaktikanta Das had praised Finance Minister Nirmala Sitharaman for her commitment to keep the fiscal deficit at the targeted 3.3% in the current financial year, raising hopes he may cut interest rates for the fourth consecutive time in August to give a leg-up to growth.