Rate cut calls rise as inflation dips to 3.78% in July

 India’s retail inflation eased in July to below the Reserve Bank of India’s 4 per cent long-term goal and industrial production showed a robust growth in June raising the clamour from industry and even the government for an interest rate cut by the RBI.

Consumer price inflation (CPI) fell to 3.78 per cent, backed by cheaper food, fruits and vegetable prices and a favourable base effect. The CPI was 5.4 per cent in June. The industrial output grew 3.8 per cent in June, a four-month high, helped by manufacturing sector pick-up and better consumer goods production.

The manufacturing sector, which constitutes over 75 per cent of the IIP index, grew at 4.6 per cent in June. However, the output of capital goods, a proxy for investment in the economy, contracted by 3.6 per cent. A 16 per cent jump was witnessed in consumer durables. Commenting on the robust industrial output, Industry body CII said the economy is picking up pace but for investment activity to resume, it is necessary that the government initiates investor-friendly reforms. The economic reforms have been stalled in Parliament due to a near washout of Monsoon session as political logjam continued.

Ficci said infrastructure reforms could bring a turnaround in the investment cycle. Economists said inflation fell beyond expectations and increased probability of more rate cuts sooner than later.

The RBI, however, has expressed concerns about high inflationary expectations among households that are feeding into higher wages. An RBI survey in June showed households expect retail inflation to move in double-digits in the next three months.

Buoyed by back-to-back good macroeconomic numbers, the finance ministry said the economy is on the mend and that made a case for a rate cut by the RBI.

“Growth in IIP for the month of June shows that the economy is on the mend. It is consistent with the growth in indirect taxes,” Finance Secretary Rajiv Mehrishi said. He added, “Inflation is also well within control. Crude oil prices are still falling.”