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CPI inflation rises, IIP growth slips: Here is experts take

Retail inflation spiked to a five-month high of 5 per cent in June on costlier fuel, despite easing food prices, reducing possibilities of an interest rate cut by the Reserve Bank in its upcoming monetary policy review, PTI reported.

The retail inflation based on Consumer Price Index (CPI) stood at 4.87 per cent in May. It was 1.46 per cent in June 2017. The earlier high was in January this year at 5.07 per cent.

Meanwhile, industrial production growth slipped to a seven-month low of 3.2 per cent in May mainly due sluggish performance of manufacturing and power sectors coupled with poor offtake of fast moving consumer goods (FMCG), PTI reported.

Factory output growth measured in terms of the Index of Industrial Production (IIP) was revised down to 4.8 per cent in April from previous estimates of 4.9 per cent, according to the data released by the Central Statistics Office (CSO).

Heres how Dalal Street experts reacted to the set of disappointing macro numbers:

Dhananjay Sinha, Head of Research, Economist & Strategist, Emkay Global
Although IIP momentum further slowed to 3.2% YoY compared with 4.8% in May 2018, the growth momentum was relatively broad-based. Some of the multiplier effect of elevated government spending and higher household leveraging is reflected in robust auto sector numbers, which in turn is the driving force of growth in capital and consumer durables growth. IIP growth in FY19 is likely to accelerate to an average of 6-6.5% v/s 4.4% in FY18.”

Retail inflation continued to harden as it stood at 5% YoY for June. Rising input prices and depreciation in the currency indicates high pipeline inflation. In the last 7 months, urban core CPI has increased at a much faster pace than rural CPI which signifies relatively stronger improvement in demand conditions in urban areas as compared to rural areas. This is also reflected in IIP numbers and strong retail credit growth of 18.6% in May 2018.

Aditi Nayar, Principal Economist, ICRA
The considerable deceleration in industrial growth to a 7-month low of 3.2% in May is disappointing, led by weaker than expected manufacturing growth.

IIP growth may record an uptick in June 2018 relative to the subdued 3.2% print for May 2018, led by an improvement in electricity and manufacturing, as well as a favourable base effect related to the yearly contraction in industrial production in June 2017.

Notwithstanding the lower-than expected prints for the IIP and headline CPI inflation, the uptick in the core-CPI inflation suggests a high likelihood of a repo rate hike in August 2018

Sunil Kumar Sinha, Director – Public Finance & Principal Economist, India Ratings and Research
IIP growth for the month of May despite a low base came in at 3.2%, weaker than last month. In fact a glance over the data of past few months indicate that factory output growth has been declining in each successive months since November 2017 with the exception of April 2018. The more disappointing part of the unfolding factory output story is weakness in manufacturing sector. Manufacturing growth has tumbled to 2.8% in May 2018 as compared to 5.2% a month ago.

Retail inflation in June 2018 came in at 5.0%, a five month high. Going forward, while base effect is likely to provide some cushion to inflation, elevated oil prices (switching over to US crude from Iran crude and changing dynamics due to US-China trade war may provide some comfort) are likely to keep pressure on retail inflation. Another cog in the wheel would be the announced kharif MSP. Our estimate shows that this has potential to add 70 bps to retail inflation.

In view of the above, it will be a tough call for MPC in its August monetary policy review. However, India Ratings and Research believe that the MPC may go for a pause in August and take a call on the policy rate in October review.

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