Mixed bag: CPI inflation eases, IIP lags pre-Covid level

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August 13, 2021 8:04 AM

The index of industrial production (IIP) grew 13.6% in June, primarily driven by the base effect (it had shrunk 16.6% in June 2020).

inflationCore inflation (excluding food and fuel) is estimated at 5.9- 6.1%, some economists said, having eased a tad from the 6.1-6.2% in June. (Photo source: Reuters)

Retail inflation eased sharply in July to 5.59%, having topped the central bank’s target band (2-6%) in the previous two months, as food inflation moderated considerably, showed the official data released on Thursday. The index of industrial production (IIP) grew 13.6% in June, primarily driven by the base effect (it had shrunk 16.6% in June 2020). The IIP still remained 5.2% lower than the pre-pandemic (June 2019) level, suggesting that a meaningful industrial recovery is still non afoot.

The drop in inflation eased pressure on the central bank in its bid to supplement growth, given that global commodity prices, especially of oil, have been on the rise and the US Federal Reserve has signalled its intent to raise interest rates later this year.

Finance minister Nirmala Sitharaman said on Thursday that the economy had not so far reached the level where liquidity support could be rolled back by the Reserve Bank of India (RBI). The moderation in price pressure has clearly added to policy-makers’ comfort. Still, while retaining the repo rate last week, the RBI raised its inflation forecasts.
Inflation in food products, which make up for about a half of the inflation basket, dropped to 3.96% in July from 5.15% in the previous month. However, fuel inflation last month dipped only slightly from June but still remained elevated at 12.38%.

Core inflation (excluding food and fuel) is estimated at 5.9- 6.1%, some economists said, having eased a tad from the 6.1-6.2% in June. In the monetary policy statement last week, the central bank said the revival of the south-west monsoon and pick-up in kharif sowing, buffered by adequate food stocks, should help in containing cereal price pressures in the months ahead.

Nevertheless, inflation may remain close to the upper tolerance band up to the second quarter, but these pressures should ebb in the third quarter on account of kharif harvest arrivals and as supply side measures take effect, it said. “Taking into consideration all these factors, CPI inflation is now projected at 5.7% during 2021-22: 5.9% in Q2; 5.3% in Q3; and 5.8% in Q4 of 2021-22, with risks broadly balanced. CPI inflation for Q1:2022-23 is projected at 5.1%,” according to the MPC statement.

As for the IIP, consumer non-durables contracted by 4.5% in June. However, other use-based categories recorded a double-digit growth from a year before, thanks to the favourable base. However, their performance was 4-62% lower than the June 2019 level, with capital goods and consumer durables registering the worst performance.

Aditi Nayar, chief economist at ICRA, said, thanks to continued unlocking, several of the available high frequency indicators for July –such as coal output, electricity demand, generation of GST e-way bills, non-oil merchandise exports and petrol consumption–have climbed above their pre-Covid (July 2019) level. “Nevertheless, a further normalisation in the base suggests that the IIP growth may slip into single-digits in July.”

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