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With a dip in vegetable and sugar prices, retail inflation skid to 16-month-low of nearly 4 per cent in January. Though this seems to be a comfortable zone for the Reserve Bank of India, it might not prompt immediate downward revision of policy interest rate.
Meanwhile, industrial growth is back in black in December.
Inflation
Retail inflation, based on Consumer Price Index (CPI), continued to slide in January and has now touched 4.06 per cent. This is the lowest after 4.62 per cent in October 2019. The headline rate for January is near median rate of targeted inflation range of 4 per cent with 2 per cent in both directions.
However, this is unlikely to prompt the RBI Governor-led Monetary Policy Committee to lower the policy rate, better knows as Repo Rate (the rate at which the RBI lends money to Scheduled Commercial Banks for a short period). One key factor could be continuous increase in fuel prices and that will also have a multiplier. Also, the RBI would like to wait for some more time to see the trend not just in headline but also in core inflation (excluding price movement in volatile products such as food and fuel). The next meeting of the MPC is likely to take place in April.
Food inflation, based on Consumer Food Price Index (CFPI), declined to 1.89 per cent in January against 3.41 per cent in December. Retail inflation for vegetables in January was negative 15.84 per cent while for sugar and confectionary it was negative at 0.26 per cent. Bird flu also appears to have affected the rate of inflation for eggs as it is now around 13 per cent against 20 per cent or more in the previous months.
However, the bad news is that inflation for non-foods has recorded a rise, which is why Aditi Nayar, Principal Economist with ICRA, expects inflation to resume an uptrend in February-March 2021. “We do not think that today’s softer-than-anticipated print creates the room for an imminent rate cut,” she said. Further, she mentioned that food prices have displayed a mixed trend so far in February. The rise in onion prices, as well as higher crude oil prices and their transmission into retail fuel prices, are areas of concern that need to be monitored.
“If the pace of growth in Q4 FY21 exceeds the prevailing tepid expectations, the stance may be revised to neutral in June 2021 MPC review. However, we anticipate that the MPC will err on the side of caution, and change the stance of monetary policy to neutral in the August 2021 review or later, only after there is greater confidence related to the economic revival,” she said.
Manufacturing
Improved manufacturing and continuous rise in electricity production helped industrial growth, based on Index of Industrial Production (IIP), and will be back in positive territory as December saw a growth of 1 per cent against over 2 per cent contraction in November.
Manufacturing, with weight of over 77 per cent in IIP, recorded growth of 1.6 per cent in December, while electricity saw a growth of 5.1 per cent.
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