Inflation eases, but India's economy not out of woods yet, feel experts

NEW DELHI:  After staying above the Reserve Bank of India’s upper tolerance limit of 6% in May and June, retail inflation returned to the central bank’s comfort zone, registering 5.59% in July, thanks to cooling of food prices.

According to data released by the Ministry of Statistics and Programme Implementation on Thursday, food inflation fell to 3.96% last month from a high of 5.15% in June. 

“The decline in prices suggests that inflation was largely a function of supply chain disruptions. We believe that inflation may ease in the coming months assuming no rise in infections. However, high oil and commodity prices will keep the pressure on prices,” said Rumki Majumdar, economist, Deloitte India. 

However, economists warn that service inflation could harden in the coming months.

“As states ease (Covid-related) restrictions, there is likely to be a shift away from goods to services-led inflation, with firmer demand to also encourage producers to increasingly pass on higher input prices,” said Radhika Rao, economist at DBS Group Research.

In its latest monetary policy review, RBI has kept the rates and stance unchanged and pledged to remain accommodative in the near future, while raising its inflation forecast to 5.7% for FY22 and 5.9% in the second quarter. 

Meanwhile, industrial output for June rose 13.6% due to low base. Factory output measured by the Index of Industrial Production had contracted 16.6% in the year-ago period. 

In June, the manufacturing sector saw output increase by 13%. Economists, however, point out that  production is yet to reach pre-Covid levels. 

According to Aditi Nayar, Chief Economist, ICRA, it’s too early to term it a recovery.  

“The production of consumer non-durables contracted by 4.5% in June, while capital goods and consumer durables continued to clock the worst performance relative to pre-pandemic levels,” she said. 

3.96% The overall food inflation softened in July from 5.15% in June.