Retail inflation rose to five-month high of 5 per cent in June while industrial production slipped to 3.2 per cent in May, according to Government data released on Thursday.
With retail inflation ruling over 4 per cent for eight straight months, the possibility of the RBI’s Monetary Policy Committee considering another rate hike, at its next policy meeting, is high. The committee is to meet under the Chairmanship of RBI Governor Urjit Patel early next month.
It is believed that inflation rate over 4 per cent for successive months and higher inflationary expectation will prompt the committee to go for rate hike.
Retail Inflation
Though retail inflation or Consumer Price Index (CPI) rose in the month of June, it was still below market expectation of 5.3 per cent as against May’s 4.87 per cent. The spike in inflation was mainly due to fuel and light, miscellaneous items, and clothing and footwear. The core-CPI inflation (total inflation minus inflation of volatile products such as food and fuel) hardened to 6.4 per cent in June, with a fairly broad-based uptrend in miscellaneous items as well as clothing and footwear.
Aditi Nayar, Principal Economist at ICRA said the impact of higher MSPs on inflation and fiscal risks and a string of expenditure announcements by State governments such as the recent crop loan waiver by Karnataka, have resulted in upside risks to the inflation trajectory for the remainder of FY19, notwithstanding a favourable base-effect and the recent dip in crude oil prices. Such factors, in conjunction with the rise in core inflation in June, suggest a high likelihood of a repo rate hike in the August policy.
In ICRA’s view, “the MPC may increase the repo rate by another 25-50 bps in FY2019, depending on the extent to which various inflationary and fiscal risks materialise,” she said.
Different view
However, Shubhada Rao, Group President and Chief Economist at YES Bank, has a slightly different view. She said a hugely positive CPI print comes much lower than consensus and our own CPI projection. A clear positive was on food price momentum that remained muted. Although “core remains elevated and may keep RBI on guard. We have not yet removed the ‘risk' of one more rate hike. However given June CPI print the urgency for tightening may get diluted,” she said.
The slowdown in the industrial production comes on the back of a moderation in the growth of core sector industries which rose 3.6 per cent in May compared to 4.6 per cent in April. The eight infrastructure sectors of coal, crude oil, natural gas, refinery products, fertilisers, steel, cement and electricity constitutes 40.27 per cent of the index of industrial production. Also manufacturing sector saw sharp moderation with growth rate going down to 2.8 per cent as against 5.2 per cent in April. Sunil Kumar Sinha, Director (Public Finance) & Principal Economist at India Ratings, said a glance at the use based classification suggests that except infrastructure/construction goods and consumer durables where also the growth has weakened since February, all other segments are showing either low or volatile growth since the beginning of 2018. “This clearly shows that industrial revival is still finding its feet after witnessing twin policy shocks of demonetisation and GST implementation,” he said.