Growth impulses remained fragile, manufacturing output tanked 9.5%
After touching a six-month high in May, India’s retail inflation was virtually unchanged in June at about 6.3%, remaining out of the central bank’s comfort zone for a second month in a row.
Economists expect the Reserve Bank of India (RBI) to revisit its inflation estimate of 5.1% for 2021-22 and stressed that lack of fiscal policy action to cool prices could precipitate a faster unwinding of RBI’s growth-supporting approach to interest rates.
Growth impulses remained fragile with the second COVID-19 wave hurting the recovery momentum, according quick estimates of industrial output for May, with output levels 8% lower than April.
Manufacturing output tanked 9.5% month-on-month, electricity production fell nearly 7%, although mining moved up marginally by 0.6% in May.
Headline factory output increased 29.3% over an incomparable May 2020, when industrial production had collapsed over 33% in the midst of a national lockdown. However, this was 13.9% below the pre-pandemic levels of May 2019.
“Consumer durables and capital goods stood out as the worst affected sectors in May, trailing the pre-COVID levels by 41.2% and 36.9%, respectively,” noted Aditi Nayar, chief economist at rating agency ICRA.
With petroleum product prices continuing to soar, fuel and light inflation hit 12.7% in June from 11.9% in May. Food inflation, which had flared up from just 2% in April to 5% in May, rose further, led by a 34.8% inflation rate for oils and fats and 19.4% for eggs.
Persistently sticky retail prices for fuel and food translated into little respite for citizens, as inflation measured by the Consumer Price Index (CPI) declined by just four basis points from May’s 6.30% print, as per the National Statistical Office. One basis point equals 0.01%.
DBS Group Research economist Radhika Rao said Monetary Policy Committee members may retain a growth focus but are likely to express discomfort on the recent bout of sticky inflation, in the absence of corrective fiscal steps like excise duty cuts on fuel.
“If the CPI inflation remains entrenched above the 6% upper threshold in the next two prints (July-August 2021), a preponement of rate normalisation can’t be ruled out,” warned Ms. Nayar, who expects the tightrope walk between supporting a ‘nascent, incomplete’ growth revival and preserving the need to anchor inflationary expectations, to continue.
“Beyond the monthly swings, inflation continues to stay above the mid-point (4%) of the inflation target since late 2019… Pipeline risks are in focus, from service inflation as the second wave ebbs, pass-through from higher input prices as well as risks of a sub-normal southwest monsoon,” Ms Rao pointed out.
While the pace of price rise slowed marginally in rural India from 6.5% in May to 6.2% in June, inflation experienced by urban consumers quickened further to 6.4% from 5.9% in May.
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