IIP contracts for third month in Oct, Nov retail inflation spikes

Onions definitely are making the economy weep, as is evident with rate of retail food inflation for the month of November, which crossed double digit. This along with other vegetables and pulses took the overall rate of retail inflation close to upper limit of targeted inflation rate.

Two sets of government data released on Thursday has some more bad news with industrial growth contracting for the third consecutive month. Factory output contracted 3.8 per cent in October. This poses a real dilemma for the Monetary Policy Committee, led by the RBI Governor.

Negative industrial growth rate warrants lower interest rate, however, higher rate of retail inflation will force the Committee not to go for any rate cut in the next round of policy review meeting scheduled in February.

Retail inflation up

According to data released by Central Statistics Office, rate of retail inflation for vegetable was nearly 36 per cent. This alone with pulses (around 14 per cent) took the rate of food inflation to little over 10 per cent which is highest after January 2014.

Food inflation was 7.89 per cent in October and in the negative zone last fiscal. Higher food inflation had a bigger impact on the overall rate of retail inflation, as represented by Consumer Price Index (CPI) and it jumped over 5 per cent. This is first time after January 2018, when rate of retail inflation has gone beyond 5 per cent.

Aditi Nayar, Principal Economist at ICRA, said that the surge in the retail inflation in November was higher than estimated

“While the CPI food inflation rose to an uncomfortably high 10 per cent in November 2019, a moderation in vegetable prices should douse food inflation to a large extent in early 2020, and healthy groundwater and reservoir levels bode well for the Rabi output and yields of various cereals,” she said while adding that decline on the yearly basis in the area sown under Rabi pulses and oilseeds poses a concern, given the high inflation being recorded by some of these items.

Under the inflation targeting mechanism, agreed upon by the government and the RBI, retail inflation rate should be 4 per cent with two per cent swing in both the direction, which means lowest rate should be two per cent and highest six per cent.

The Monetary authority feels comfortable at the median rate of 4 per cent and this helped the Monetary Policy Committee to lower the policy interest rate by 1.35 per cent during current fiscal. However, it took a pause during last review meeting held earlier this month and this is likely to continue in February.

“ICRA expects the CPI inflation to spike further to 5.8-6.0 per cent in December 2019, close to the upper threshold of the MPC’s medium-term target, driven by the recent revision in telecom tariffs. As a result, we expect the MPC to remain on hold in its February 2020 policy review,” Nayar said.

Worrying industrial front

Meanwhile, industrial production contracted by 3.8 per cent in October, mainly due to deceleration in manufacturing besides the power and mining sectors,. Factory output, as measured in terms of Index of Industrial Production (IIP), had expanded 8.4 per cent in October 2018.

The manufacturing sector contracted 2.1 per cent in October as compared with an 8.2-per-cent growth a year ago. Power generation dipped sharply by 12.2 per cent in October, compared to 10.8 per cent growth in the year-ago period. Mining output too fell 8 per cent in the month under review as against 7.3 per cent growth in the corresponding period last fiscal.

Sujan Hajra, Chief Economist Anand Rathi Shares & Stock Brokers, felt that the IIP number, although in negative, is better than expected given that in October 19 there were several holidays when factories were shut. This reflects a reasonably good festive sales and perhaps clearing of inventories.

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