The Indian economy recorded a varied trend with the Consume Price Index (CPI) rising to 4.8 per cent in June from 4.31 per cent in May. At the same time, industrial growth, based on Index of Industrial Production (IIP), moved up to 5.2 per cent in May from 4.4 per cent in April.

Raised vegetable prices led by TOP (tomatoes, onion and potatoes), along with steadily higher prices of cereals and species, had put a break on easing of retail inflation for four months. The apprehension now is that vegetables will continue to lead the rise in inflation and the expected timeline of reaching 4 per cent median rate will possibly be stretched further. This also means that the wait for lowering of interest rate will be longer.

The key concern now is lower sowing on account of uneven movement of monsoon. Aditi Nayar, Chief Economist with ICRA, said due to the below normal rains in June kharif sowing was 8.7 per cent lower on a year-on-year basis as on July 7. Given that 50 per cent of the total kharif sowing takes place July, well-distributed rainfall in the ongoing month across all regions will be critical to replenish reservoirs and accelerate the pace of kharif sowing.

“Amid the ongoing excess rainfall in North India, the surge in the prices of perishables, particularly vegetables, is likely to harden the food inflation further in the immediate term. Besides, the impact of El Nino on monsoons and sowing in India needs to be carefully monitored,” she said.

Rajni Sinha, Chief Economist with Care Ratings, also said that if the distribution of rain remains skewed, it could have an adverse impact on kharif sowing and further aggravate food inflation. While food inflation is a concern, the comforting factor is that the WPI has been contracting. Deflation in WPI will have an impact on CPI inflation going forward. The RBI is likely to remain cautious and adopt a wait-and-watch mode. We reaffirm our view that RBI would maintain an extended pause in 2023, she said.

According to Nayar, the spike in vegetable prices is set to push the CPI inflation to an uncomfortable 5.3-5.5 per cent in July. We expect the vegetable price shock to result in the Q2 FY2024 CPI inflation exceeding the MPC’s last forecast of 5.2 per cent. Accordingly, we anticipate that the committee will retain its hawkish tone in August, keep the repo rate unchanged, and signal that a pivot to rate cuts remains distant,” she said.

Industrial growth

Despite industrial growth nearly 8 per cent higher than the pre-Covid level, economists felt the recovery is still fragile. In a note, Devendra Kumar Pant (Chief Economist), India Ratings & Research (Ind-Ra), said he believes IIP is expected to grow at a modest pace in the near term as indicated by high-frequency indicators such as coal production, power demand, steel production; sustained government capex; and expected stabilisation of inflation around 5 per cent. “Overall, the agency expects the IIP to be range-bound at 5 per cent y-o-y in June,” said the note.

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