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Retail inflation quickens to 22-month high; factory output rebounds

12 July, 2016

India’s retail inflation accelerated for a third consecutive month in June to a 22-month high as food prices continued to rise, government data showed on Tuesday.

Consumer prices increased by an annual 5.77% in June from May’s 5.76% gain, the data showed. Retail inflation was last higher than June’s level in August 2014 when it came in at 7.73%. Food inflation rose an annual 7.79% during the month compared with 7.47% in May, the data showed.

A separate set of data released by the government showed industrial output in May rebounded after shrinking the previous month. The Index of Industrial Production rose 1.2% in May from April’s 0.8% contraction. Cumulative output for the April-May period shrank 0.1%. 

Factory output in May was led higher by a 4.7% growth in electricity generation. Mining output grew 1.3% while manufacturing nudged up 0.7%.

The two sets of data highlight the challenges authorities face in ensuring the Indian economy grows at a sustained pace. India’s gross domestic product expanded 7.6% in the financial year 2015-16. The government hopes growth will accelerate this year but the overhang of drought in the past two years, a bad-loans crisis at state-run banks could make it difficult. Tepid factory output and accelerating inflation will make matters even more challenging.

The inflation data also adds weight to the Reserve Bank of India’s (RBI) concerns on inflation that prompted it to keep its benchmark interest rate unchanged in June. Consumer inflation is a key metric that the RBI tracks to decide interest rates.

The RBI has set a target for retail inflation at 5% by March 2017, and has said that it could cut interest rates if prices nudge down. But an uptick in inflation will make it difficult for RBI governor Raghuram Rajan to cut rates at the next policy review on August 9.

While retail inflation has edged up, it remains far below the 10-11% level when Rajan took over as the RBI chief three years ago. Rajan’s tenure ends in September after he last month decided to not seek an extension.

Rural-urban divide

Inflation trajectory in coming months will depend a lot on monsoon rain, which is critical for the farm economy. India has received below-normal rainfall for two years in a row, leading to a drought in several areas, but this year’s forecast is for normal to above-average showers.

While poor rainfall in the past two years depressed rural wages and demand, rural inflation had been on an uptick. In fact, rural inflation has been higher than urban inflation in recent months. 

In June, rural inflation came in at 6.20% while urban inflation was 5.26%. However, there is reason to cheer as rural inflation during the month eased from 6.45% in May. Urban inflation, though, quickened from 4.89%.

Other factors that threaten to push inflation higher in coming months are a rise in crude oil prices—India imports three-fourths of its crude oil requirement—and a new tax on some services that India imposed from June 1 to help the farm sector. An increase in salaries of about 50 lakh government employees from January as per the recommendations of the seventh pay commission is also expected to push inflation higher.

Data released on Tuesday showed also that fuel prices in June rose an annual 2.92%, a tad lower than a month before. Among food items, prices of pulses jumped almost 27%, easing from a 31.57% rise in May. Sugar prices rose almost 16.79% and vegetable prices climbed 14.74%, both quickening from May.

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Retail inflation quickens to 22-month high; factory output rebounds

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