Retail inflation eased for a third straight month to touch a fresh low of 1.54% in June, lower than the central bank’s forecast of 2-3.5% for the first half of the current fiscal, showed the official data released on Wednesday. Index of industrial production (IIP) grew just 1.7% in May, the slowest since July 2015, reflecting the impact of an unfavourable base and pre-GST curtailment of stocks that may have lowered fresh output in some cases.
The moderation in inflation was fairly broad-based (albeit aided by a favourable base effect), as both food and core inflation hit a series low of -2.12% and 3.9%, respectively, in June. With the GST regime expected to have a benign impact on prices (half of the CPI basket is GST-exempt), the latest drop in inflation below the RBI’s forecast bolsters the case for a rate cut later this fiscal, said analysts. The risk to inflation from the hike in allowances of central government staff from July 1 is going to be staggered over one year through Q1, FY19 and may be restricted to just 40-50 basis points, said the analysts. A good monsoon, as has been the forecast, will only help ease price pressure in food items. As such, real interest rate touched a 15-year high in 2016-17, much to the chagrin of companies. Some analysts reckon inflation will stay around 4% by March 2018, in sync with the RBI’s projection.
Chief economic advisor (CEA) Arvind Subramanian pointed out the last time India witnessed such low inflation (albeit according to a slightly different series — CPI for industrial workers) was in 1999 and before that in August 1978. “This low, heartening number is consistent with our analysis for some time now (and which will be fully elaborated in the forthcoming Economic Survey) of a paradigm shift in the inflationary process to low levels of inflation—a shift that I think has been missed by all reflected in the large, one-sided, and systemic inflation forecast errors that have been made,” Subramanian said.
Clearly this low inflation number and the latest moderation in the IIP data are “something that, I am sure, all policy makers will reflect upon very very carefully”, the CEA said. After the monetary policy committee (MPC) decided to keep key policy rates unchanged in June, the CEA had criticised the RBI’s “large” inflation forecast errors.
Amid criticism, the RBI last month trimmed its forecast of CPI inflation to 2-3.5% for the first half of 2017-18 and 3.5-4.5% in the second half. In April, it had forecast retail inflation to average 4.5% in the first half of 2017-18 and 5% in the second half.
DK Pant, chief economist at India Ratings, expects around 45bps-50bps increase in CPI inflation due to increase in the HRA for central government staff. Present phase of low CPI inflation can absorb this increase, he said. Since inflation in both manufactured and services category has eased in June from the previous month, Pant predicted high probability of rate cut by RBI, maybe as early as August. This is partly due to the fact that the IIP data also suggest a contraction in consumer durable and capital goods and flat growth in goods output in infrastructure/construction.
The official data showed IIP growth for April has been revised down to 2.8% from 3.1% reported earlier. “Despite the sequential improvement recorded by crude oil and natural gas, the mining sector recorded a surprising contraction in May 2017,” said Aditi Nayar, principal economist at ICRA.
The only encouraging trend offered by the disaggregated data comes in the form of the healthy 7.9% growth in consumer non durables output in May 2017, even as the year-on-year de-growth in consumer durables and capital goods persisted, and the intermediate and infrastructure indices posted marginal growth, she said.
Manufacturing growth dropped to just 1.2% in May, against 2.3% in the previous month. As many as 11 of the sub-sectors of manufacturing, with a weight of 37% in the IIP, recorded contraction in May from a year before.