India’s retail inflation accelerated for a fourth straight month in July to climb above the government’s targeted upper limit of 6% as food prices jumped, indicating the difficulties the central bank faces in lowering interest rates in the near term.
Consumer prices increased by an annual 6.07% to a 23-month high in July from June’s 5.77% gain, government data showed on Friday. Food inflation rose an annual 8.35% during the month from 7.79% in June.
Retail inflation was last higher than July’s level in August 2014 when it came in at 7.73%. However, its quick acceleration will cause concern for a government that only last week notified the 4% inflation target with a range of plus or minus 2% for the next five years under the monetary policy framework agreement with the Reserve Bank of India.
July’s reading is also higher than the RBI’s 5% target for retail inflation by March 2017, and comes days after central bank governor Raghuram Rajan kept interest rates unchanged—citing inflation fears—in his last monetary policy before he returns to academia next month. Consumer inflation is a key metric that the RBI tracks to decide interest rates.
NR Bhanumurthy, a professor at the New Delhi-based National Institute of Public Finance and Policy, said that non-food inflation could become a worry considering that central government employees have begun receiving disbursements of arrears following the implementation of seventh pay panel’s report.
Central government employees will receive an additional Rs 1.14 lakh crore in compensation, as per the pay panel’s report, boosting consumer demand.
“The demand-side impact will have to be seen,” said Bhanumurthy. He added that a better monsoon this year could help control food inflation by December. “A transmitting element may be playing out in food prices,” he said.
Meanwhile, a second set of data showed industrial output expanded an annual 2.1% in June compared with a revised 1.1% gain the previous month. This is the second consecutive month of an increase in the Index of Industrial Production after April’s 0.8% contraction. Cumulative output for the April-June period rose 0.6%.
Factory output in June was led higher by an 8.3% rise in electricity generation. Mining output grew 4.7% while manufacturing edged up 0.9%.
Tepid factory output and accelerating inflation will make it tougher for authorities to ensure the Indian economy keeps growing at a sustained pace. The government hopes growth will accelerate this year from the 7.6% expansion in 2015-16, but the overhang of drought in the past two years and a bad-loans crisis at state-run banks could make it difficult. Monsoon rainfall this year, however, is likely to be normal, helping boost the rural economy.
Inflation has been hurting the rural economy, too. In July, rural inflation came in at 6.66% while urban inflation was 5.39%.
Data released on Friday showed also that fuel prices in July rose an annual 2.75%, a tad lower than a month before. Among food items, prices of pulses jumped almost 27.5% while that of sugar rose 21.9% and of vegetables climbed 14%.
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