Retail inflation at 5-year low but factory output dips to 1.7%

Factory output turned in sluggish numbers in May, while consumer inflation eased to its lowest level since the index’s inception in January 2012, prompting hopes of a rate cut by the Reserve Bank of India (RBI) in its policy review next month.

Consumer price index (CPI)-based inflation eased to 1.54 per cent in June from 2.18 per cent in May as food items such as pulses and vegetables became cheaper. The CPI stood at 5.77 per cent in June 2016.

Food inflation down Food price inflation also contracted 2.12 per cent in June. It had fallen 1.05 per cent in May.

Chief Economic Adviser Arvind Subramanian termed the inflation data “heartening” and said it shows consolidation of a macro-economic stability.

“This low number and what it implies about underlying price pressures — as well as the latest IIP data — is something that all policymakers will reflect upon very, very carefully,” Subramanian said, noting that the last time inflation was so low was in 1999 and in August 1978, though with different indices.

In the second bi-monthly monetary policy review on June 6 and 7, the RBI had maintained lending rates, leaving both industry and the Finance Ministry disappointed. The next review will be announced on August 2.

Mining dip The Index of Industrial Production (IIP) grew 1.7 per cent in May, bogged down by a dip in mining and little growth in manufacturing activities.

It had expanded at a more robust 2.79 per cent in April, and 8 per cent in May 2016.

“The cumulative growth for the period April-May 2017 over the corresponding period of the previous year stands at 2.3 percent,” said an official report released on Wednesday.

While mining contracted by 0.9 per cent in May, manufacturing grew a mere 1.2 per cent, and eelectricity generation rose 8.7 per cent.

Cautious approach More worryingly, the use-based classification of industries reveals that companies as well as consumers remained cautious about investments and big purchases.

Primary goods grew 3.4 per cent in May while capital goods, which denote investment, contracted even more steeply — by 3.9 per cent — as against a dip of 2.9 per cent in April. Growth in intermediate and infrastructure goods was also subdued at 0.7 per cent and 0.1 per cent, respectively.

Consumer durables shrink Retail purchases were also muted with consumer non-durables contracting 4.5 per cent in May although consumer durables grew by 7.9 per cent.

Analysts however, said the low inflation was due to the base effect, and that the RBI may choose to wait before cutting policy rates.

“With a reversal of the favourable base effect likely to push CPI inflation above 4 per cent during the second half of the fiscal, there is a low likelihood of further rate cuts in the second half of 2017-18,” said Aditi Nayar, Principal Economist, ICRA.

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