Retail inflation surged to eight month high of 5.4 per cent in June mainly due to costlier food items limiting the room for RBI to cut rates next month.
The retail inflation measured on Consumer Price Index (CPI) was at 5.01 per cent in May. It was at 6.77 per cent in June last year.
The rise in inflation, a key factor considered by the RBI in deciding the bi-monthly monetary policy, comes in the backdrop of slowdown in factory output.
The Index of Industrial Index (IIP) in May slowed to 2.7 per cent from 5.6 per cent year ago leading to demands of rate cut from the RBI in its next policy review on August 4.
As per the data released by the Statistics Office (CSO) today, prices of pulses rose by 22.24 per cent in June year-on-year.
The overall food inflation increased to 5.48 per cent in June from 4.8 per cent in the previous month. The retail food inflation was however 7.21 per cent in June 2014.
Finance Secretary Rajiv Mehrishi said that the rise in June retail inflation is not “significant” and expected it to come down on the back of better monsoon.
He further said the structural inflation remains under control and the upward movement in prices of agricultural items is a “blip”.
The inflation for fruit and vegetables was 3.51 per cent and 5.37 per cent, respectively, in the month under review.
Among others, milk and its products were costlier by 7.18 per cent in June over the same month last year.
CSO data also showed that prices of protein-rich items like meat and fish rose by 6.99 per cent, while spices turned costlier by 9.71 per cent in the month.
Commenting on the data, Economist with ICRA Aditi Nayar said while the hardening in vegetable prices is largely seasonal, the sharp increase in prices of protein items poses a larger concern.
Prices of prepared snacks and meals rose by 7.84 per cent, clothing and footwear category by 6.34 per cent, housing by 4.48 per cent and fuel and light by 5.92 per cent.
Among other categories, oils and fats prices rose by 3.06 per cent, cereals and products by 1.98 per cent, while that of egg rose by 5.09 per cent in June.
The prices of sugar and confectionery items fell by 8.55 per cent in June compared to same month last year.
CPI & IIP: Macro disappointment – Inflation crawls up, IIP slips
Inflation in June crawled up to 5.4% from 5% in May due to a 70 bps increase in food inflation. Higher protein inflation – 9.7% in June compared with 8.2% in May – was behind the food inflation pick-up. Inflation in pulses crossed 22% in June as production has suffered largely a result of weak monsoons last year and damage to crops from unseasonal rains this year. So far, the monsoon scenario remains favourable with rainfall at 4% below long term average as on July 8, 2015. But, healthy and well-distributed rainfall in July and August months will be most crucial to watch. We go by Indian Meteorological Department’s (IMD) forecast of 12% deficient rainfall, but assume the distribution remains normal, and that the government undertakes proactive steps to contain food inflation. We therefore expect CPI inflation at 5.8% in 2015-16, down from 6% in 2014-15.
Industrial production growth inched down to 2.7% in May from 3.4% in the month of April. However, despite the volatility, IIP numbers have averaged at a higher level in 2015 – at 3.5% since January 2015 as compared to 1.4% in the five months prior to that. Therefore, IIP data suggests an improvement in industrial activity this year in comparison to 2014, so far. In May, IIP growth slowed as the manufacturing sector lost momentum on the back of weak performance of consumer oriented sectors. Unseasonal rains earlier in the year resulting in lower rural demand are weighing in on consumer goods. This is reflected in lower two wheeler and tractor sales in April and May. Therefore a favourable distribution of rainfall so far and deficiency at -4% of LPA – much lower than last year – is a welcome respite. Rainfall during the next two months will determine the fate of agriculture, rural demand and hence industry. For now, assuming rainfall deficiency of 12% but a favourable distribution of rainfall, we expect GDP growth to rise to 7.4% in FY16 with 1.5% growth in agriculture and 6.5% growth in industry
SUJAN HAZRA, CHIEF ECONOMIST AT ANAND RATHI SECURITIES, MUMBAI
“I don’t think there’s any scope for RBI to cut rates in August again. Our assessment is that RBI won’t be cutting rates for the rest of this calendar (year). Our expectation was more or less 5.2 percent inflation so the inflation has come slightly ahead of this number. Major part of this is because food inflation has come higher than expected.
Of late, we have heard that with the new crop hitting the market, food prices have actually started softening. In fact, in the next month we expect both food inflation and headline inflation to soften a bit.”
N.R.BHANUMURTHY, ECONOMIST, NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY
“On the back of a bad monsoon, June CPI inflation seems to be under control, and is within the RBI target of 6 percent.”
“I don’t see any change in RBI’s stance that would, right now, largely depend on what is happening in China and its impact on foreign exchange inflows.”
“I don’t expect inflation pressures to go up as the monsoon appears to be slightly better than what was predicted earlier. Commodity prices have also fallen after developments in China.”
JYOTINDER KAUR, PRINCIPAL ECONOMIST, HDFC BANK, MUMBAI
“Food inflation is higher than expectations presumably due to pulses and oil seeds prices, which have been a worry over the last 2-3 months. This poses risk to our view of a rate cut in August. One should expect a cautious tone by the central bank in the August review.”
GAURAV KAPUR, SENIOR ECONOMIST, ROYAL BANK OF SCOTLAND
“It is higher than expected. Food inflation is what would explain the sharp jump… In any case, we are entering a period where there is a gap between the old crop and the fresh crop, so there is a phase where you see pressure on food prices.
“Any hope of a rate cut in the near future is off the table now, given this kind of number, combined with the fact the monsoon has been weaker in the last couple of weeks. This is playing along the lines of what the RBI had talked of in terms of its risks.
“Any near-term move on rates is out of the question.”
SONAL VARMA, INDIA ECONOMIST AT NOMURA, MUMBAI
“The surprising factor for CPI to go up was that it was food driven while we were expecting it to be driven by core inflation given the increase in service tax in June. We expect the RBI to be on hold for now.”
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT, MUMBAI
“The reason for rise in inflation is base affect. It is unlikely RBI would do any policy action in August. However, we do expect RBI to cut rates by the end of the year. Food inflation could be on the higher side but structural pressures should be out as minimum support prices have seen only marginal increase.”