HYDERABAD: Retail inflation touched a 7-month high at 3.05 per cent in May, indicating that low interest rates and low inflation isn’t uncertain, but unreal. However, in a sigh of relief for India’s fiscal policymakers, April’s factory output picked up raising hopes of a revival in industrial production and investment activity. While headline inflation, that stood below RBI’s 4 per cent target consecutively for 10 months points to hopes for another rate cut this fiscal, the rebound in IIP implies an uptick in government spending, which could spur growth.
Led by vegetable and pulses prices, food inflation, that has been declining since December, touched a 11-month high last month. At the same time, prices of pulses too shot up after a gap of 29 months. While price rise in vegetables is seasonal, base effect inflation in pulses is expected to moderate in coming months, while fruits and vegetable prices will depend much on how monsoon behaves.
Even if food prices spike, RBI is unlikely to develop cold feet as food and fuel, which account for 57 per cent of the CPI basket, have limited direct influence on monetary policy. That said, volatile oil prices, rupee fluctuation, and growth fears could topple that belief and influence RBI decisions.
As of now, a far better measure of inflation, ie , core inflation, excluding fuel, food and electricity prices, stood at a 23-month low at 4.37 per cent reflecting weak demand, while services inflation, a major driver of retail inflation also slowed down. “In view of the above, we believe RBI may pursue policy that would be supportive of growth. Although the impact of monetary policy is felt with a lag, there’s scope for one more rate cut in FY20,” said Sunil Kumar Sinha, Director - Public Finance & Principal Economist, India Ratings.
Meanwhile, April’s factory output printed at 3.4 per cent was led by electricity and mining sector, while manufacturing, which accounts for 77 per cent of the index, is yet to regain its past glory. Despite poor growth in manufacturing, sectors like food products, apparel, wood products grew in double digits. “On the whole picture is not encouraging on the industrial production front...Given the fluctuation in IIP growth data, it’s difficult to believe that we are on our way or anywhere near to a broad-based and sustainable industrial recovery,” he said.