Consumer price inflation rose marginally to 5.01 per cent in May but remained in the comfort zone from a perspective of RBI's monetary policy and future rate cuts, according to data released by Ministry of Statistics and Programme Implementation (MOSPI) on Friday.
While unseasonal rains, which destroyed majority of rabi or winter crop in the country, has had limited impact on food prices given the government's decision to release buffer stock, expectations of a below-normal monsoon may push the prices up in the coming months.
Food price inflation for May was subdued with prices rising by 4.8 per cent compared with 5.11 per cent in April. Overall consumer inflation was just marginally above the 4.87 per cent mark in April, official data show.
RBI is now targeting a flexible inflation rate in the 2-6 per cent range.
Rising prices of fuel due to weak rupee and a rise in crude oil prices have brought back concerns of inflation rising again. Although crude prices are still below the $100 level that they traded last year, prices have rocketed from record lows they reached in January-February this year. There also has been a reversal of trend as far as rupee is concerned—the currency has depreciated from under 60 to a dollar in 2014 to around 64 against the green-back on Friday.
Since much of Indian fuel requirements is met through imports, weak currency exacerbates impact of higher crude oil price on domestic inflation.
While RBI in its latest monetary policy review delivered a rate cut of 25 bps, governor Raghuram Rajan was more dovish for future cuts given the upside risks to inflation.
"Putting more weight on the IMD’s monsoon projections than the more optimistic projections of private forecasters as well as accounting for the possible inflationary effects of the increases in the service tax rate to 14 per cent, the risks to the central trajectory are tilted to the upside," RBI had said.
The central bank also revised its inflation forecasts predicting a pull down in inflation till August owing to base effects and then prices rising thereafter to about 6 per cent by January 2016.
Meanwhile, industrial output rose in April by 4.1 per cent, government data showed.
This is contrast to its own data in core industries which comprises over one-third of the weight of items included in the index of industrial production (IIP). The index of eight core industries declined in April to lowest level in a decade as production in five of eight core sectors recorded contraction.
Two of the three major sectors in IIP—mining and electricity—witnessed a decline in April. The mining sector saw a slowdown in activity to 0.6 per cent against 0.9 per cent growth in March while electricity generation slumped to the lowest in more than two years with sector contracting by 0.5 per cent.
Manufacturing sector, on the other hand, expanded by 5.1 per cent, a tad bit lower than the nine-month high of 5.2 per cent it hit in February but almost doubled up compared to the growth in March.
In terms of industries, 16 of the 22 industry groups in the manufacturing sector showed positive growth during the month.
According to use-based classification, output expanded in all three sectors, basic goods output was up 2.8 per cent after hitting a one and a half year low last month, capital goods was up to a three-month high of 11.1 per cent and intermediate goods was up by 3.3 per cent. The rise in capital goods output is encouraging as it is a lead indicator of business activity picking in the near term.
The rise in manufacturing is a positive news for the government which is hoping for a pick up in the sector given the thrust to Make in India campaign. But with investors fast losing confidence in the Indian economy, the government would have to show more than numbers and clear major legislation in order to keep the momentum in the economy going.