By Ritika Chhabra
The inflation in August inched higher to 7.0%, compared to 6.7% in July. The uptick in CPI was due to the higher inflation in the food & beverages category which constitutes 46% of the CPI basket. The food inflation jumped to 7.57% in August against 6.7% in the previous month. Within food, vegetables and cereals rose by 13.2% and 9.6% respectively as a result of low base and soaring prices of onions and potatoes in vegetables and rice and wheat in cereals. Inflation in the fuel & light group eased to 10.8% from 11.8% in July 2022 following the continued softening of crude prices in international markets. The clothing & footwear prices inched up to 9.9% from 9.9% in the preceding month.
Over the last few months, the government has taken several steps to ease domestic inflation such as a cut in excise duty on petrol and diesel, quantitative restrictions on exports of a host of commodities mainly metals & minerals, a ban on wheat exports, and an increase in import duty on gold. These steps have helped to bring down inflation over the past few months. The government is at work again to rein in the rising inflation. With effect from September 9, it imposed a duty of 20% on exports of non-basmati rice and banned exports of broken rice to tame the rising prices after a below-average rainfall leading to lower paddy acreage.
That said, in the coming months, inflation is expected to stay elevated in the range of 6.5% -6.7%, due to high food prices. The lag in Kharif sowing and uneven distribution of the southwest monsoon will keep upward pressure on food inflation. In addition, strong demand due to the festive season will translate to higher service inflation. With inflation above the upper tolerance limit and Fed & ECB following aggressive monetary tightening, we expect RBI to raise the repo rate by 40bps in the coming MPC meeting.
Index of Industrial Production (IIP)
The IIP index rose by 2.4% on a year-on-year basis in July 2022, much slower than the 12.3% growth recorded in the preceding month. The slow growth in the index is mainly due to the waning of the base effect. The output of mined products declined by 3.3%, while electricity generation increased by a mere 2.3%. The manufacturing sector reported a 3.2% growth in production. Of the 23 sub-groups of the manufacturing sector, 14 reported a rise in production, while nine reported a fall. Among the use-based classification of IIP, the output of primary goods rose by 2.5% and that of intermediate goods rose by 3.6%. Production of capital goods grew by 5.8% and that of infrastructure/construction goods grew by 3.9%. Among consumer goods, production of durables rose by 2.4%, while that of non-durables declined by 2%.
We expect industrial growth to remain robust backed by improvement in capacity utilization levels and a healthy order pipeline as indicated by the RBI’s recent survey on the Industrial outlook of the manufacturing sector. The manufacturers continue to expect sequential improvement in demand conditions and overall business situation. However, any material slowdown in global growth can have a spillover effect on domestic recovery.
(Ritika Chhabra is an Economist and Quant Analyst at Prabhudas Lilladher. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)