Two crucial data points – factory output and retail inflation – released on Wednesday spelt good news for the Indian economy, opening up room for more monetary easing sooner than later this year.
Aided by sharp rise in manufacturing growth, the index of industrial production (IIP) grew at a two-month high of 3.8 per cent in June, higher than 2.7 per cent in May this year.
Factory output grew 4.1 per cent in April 2015.
Manufacturing – with weightage of 75 per cent in the IIP – grew a robust 4.6 per cent, much higher than the 2.2 per cent growth seen in May 2015.
The latest IIP print was, however, lower than 4.3 per cent growth recorded in June last year.
Inflation cheer Consumer Price Index (CPI)-based inflation for July fell sharply to 3.78 per cent, helped by a sharp fall in food prices, which account for nearly half the index, and some base effect.
Retail inflation was 5.40 per cent in June 2015 and 7.39 per cent in July 2014.
Food price inflation fell sharply to 2.15 per cent (5.48 per cent). Vegetable prices contracted 7.93 per cent for the month under review. However, the worrying news is inflation in pulses continues to remain over 20 per cent but could head down in the coming months responding to imports. Core inflation fell to 4 per cent from 4.6 per cent.
The sharp fall in CPI in July has opened up the possibility of interest rate cut by the Reserve Bank of India in September, say economists.
Devendra Kumar Pant, Chief Economist, India Ratings & Research, said that the July CPI of 3.78 per cent was much below the expectation and mainly due to sharp fall in food inflation.
“It is contradictory to daily price data released by the government. July vegetable prices have declined by nearly 8 per cent.
This (fall in retail inflation) will have a favourable impact on bond pricing and increase in probability of monetary easing”, he said.
RBI target Rishi Shah, an economist with Deloitte, said the key takeaway from the current print was that the inflation could likely undershoot RBI’s target of 6 per cent by January next year.
Chances of a further 25 basis points cut has clearly increased given the latest inflation print, Shah said.
srivats.kr@thehindu.co.in