Retail inflation based on Consumer Price Index (CPI) slowed down to 5 month low of 6.71 per cent in July as against 7.01 per cent in June . Still, it is higher than the upper band of targeted inflation range (2-6) per cent which triggered expectation of another hike in policy interest rate.

Meanwhile, Industrial growth rate based on Index of Industrial production (IIP) slowed a bit to 12.3 per cent in June as against 19.63 per cent in May.

Retail inflation

Lower prices of food items impacted headline inflation. It would have been much lower, had fuel inflation not gone up by over 1.5 per cent on a month-to-month basis. Further, some food items such as cereals and wheat are showing higher inflation.

Although global prices of crude and food items are coming down, irregular monsoon is creating some anxieties. At the same time, new geopolitical tension on account of China-Taiwan tensions is adding to the concerns.

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SBI in its research report, authored by Group Chief Economic Advisor Soumya Kanti Ghosh, said: “Going forward, we now expect inflation trajectory for India to be benign. CPI numbers for March ‘23 could be even lower than 5 per cent. While the crude has exhibited signs of softening thereby cooling off inflationary concerns further locally, we are in a paradoxical situation where inflation trajectory may not have a cascading effect on runaway exchange rate dynamics as sentiments in South China sea could steer the patchy global sentiments.”

Also, inflation numbers in the US are likely to scale downwards though the core might remain elevated.

Dollar impact

“The appreciation of the US dollar can feed into imported inflation pressures in India leading to slower correction in CPI reading, and that remains as an upside risk. Under the evolving situation, the repo rate will tend to be at 6 per +/- 25 bps by end of FY23,” the report said.

India Ratings & Research (Ind-Ra), in a note authored by Sunil Kumar Sinha and Paras Jasrai said it believes the base effect will remain unfavourable till October and will continue to exert pressure on inflation. Impact of monitory policy on inflation is generally felt within a gap of six- to nine-months.

“Decline in inflation trend is no doubt good news for the monetary authority, Ind-Ra believes more rate hikes may still follow depending on the incoming data in the rest of FY23. As things stand now, Ind-Ra contemplates another 25-50bps hike in repo rate FY23,” the note said.

Industrial growth

Among the industrial sector, electricity and manufacturing clocked a robust growth of 16.4 per cent and 12.5 per cent, respectively, in June. The mining sector grew by 7.5 per cent in the same period. The double-digit y-o-y growth of 12.7 per cent in April-June quarter is indicative of industrial recovery remaining on course despite global headwinds or uncertainty.

Aditi Nayar, Chief Economist with ICRA, said, “Given the moderation in the y-o-y performance recorded by most high frequency indicators in July, such as electricity generation, non-oil exports etc., we expect the IIP growth to ease to high single digits in that month.”

Rajani Sinha, Chief Economist with CARE, feels improved performance of consumer non-durables after having witnessed muted growth in the previous months is encouraging sign.

“Going ahead, we expect consumer demand to improve further ahead of the festival season. However, elevated global commodity prices, slowdown in global economies and high inflation are expected to be the main downside risks to the industrial growth momentum,” she said. 

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