By Ritika Chhabra
Markets have got another reason to cheer as price increases continue to decelerate, according to the latest inflation print. The CPI fell to 6.7% on-year in July, the lowest in the last five months, against 7.01% on-year in June 2022. At the category level, the food and beverage inflation eased to 6.7% vs 7.6% in the previous month, with vegetable prices being the main driver behind this fall. Over the last few months, vegetable prices were one of the largest contributors to food inflation. The vegetable inflation slowed to 10.9% in July vs 17.3% in June which brought down the overall headline inflation number. The core CPI index that excludes food and fuel marginally softened to 5.95% from 6.02% a month back. However, inflation in the fuel & light group rose to 11.8% from 10.1% in June 2022.
The peak inflation seems to be behind us as near-term upside risks to prices have been on a decline. Commodity prices continue to shed the highs recorded in the first half of the year. The international price of crude has come down to $90 a barrel from close to $140 a barrel. However, the CPI may continue to hover just above RBI’s upper tolerance band of 6% for a few more months. The low base effect of food and fuel will keep the inflation number elevated from next month. In addition, sustained weakness in the rupee may dull the effectiveness of government efforts to tame consumer price rises. But the good news is inflation is most likely not going to worsen from the current levels.
Talking about IIP numbers, the index rose by 12.3% on a year-on-year basis in June 2022, against the consensus estimate of 10.6%. The strong growth was led by the electricity and manufacturing sectors which grew by 16.4% and 12.5% respectively. The output of mined products rose by 7.5%. The growth was broad-based, with 21 of the 23 sub-groups of the manufacturing sector reporting a rise in production. Among the use-based classification of IIP, the output of most sub-segments grew in double digits on a YoY basis, barring infrastructure/construction goods that rose by 8.0% and consumer non-durable that continued to remain a drag by recording a mere 2.9% growth.
Interestingly, India has fared much better than other emerging and developed economies in bringing down inflation, at the same time keeping the economic growth buoyant. While the US and EU are heading towards an economic recession, India is projected to grow at 7.4% in FY23 as per IMF estimates. Starting from the government’s calculated response to tackle Covid-19 by not expanding the balance sheet substantially for cash hand-outs, to imposing export duties and quantitative restrictions on exports of a host of commodities mainly metals & minerals to tame inflation, India has been able to escape the stagflationary headwinds.
Going forward, inflation will likely be under RBI’s upper tolerance band by December 2022 or early next year. With much of the front loading of rate hikes already taken place, the RBI is expected to slow the pace or the quantum of rate hikes. In absence of any new geo-political tensions and supply chain constraints, softening of inflation and modest economic growth will put India in a relative sweet spot against most of the economies grappling with growth and price uncertainties.
(Ritika Chhabra is an Economist and Quant Analyst at Prabhudas Lilladher. The views expressed are the author’s own and do not reflect the official position or policy of FinancialExpress.com.)