Retail inflation unexpectedly hit a record low of 3.78% in July as food inflation plunged, while industrial production rose 3.8% in June against 2.5% in the previous month, presenting a feel-good factor for policy makers.
While the latest drop in food inflation to 2.15% from 5.48% in the previous month was aided by a conducive base effect (CPI food inflation was as high as 8.85% in July last year), some analysts also expressed surprise at the steep fall in fruit and vegetable inflation for the month (1.45% and -7.93%, respectively). At 4.3% in July, core CPI inflation remained higher than the headline CPI.
As far as industrial production was concerned, a 16% expansion in the consumer durables segment, which witnessed contraction in 10 of the 12 months through July, came off a favourable base (it was -23.3% in July 2014) and capital goods witnessed the first contraction after seven months (-3.6% in July). This, analysts said, indicated that a meaningful recovery in both private consumption and investment was still to come.
Analysts said though the sharp fall in retail inflation from as high as 5.4% in June has brightened chances of further monetary easing, the Reserve Bank Of India (RBI) would closely watch the August inflation data to see if the fall is indeed a trend. It would also be mindful of any signal on a interest rate hike by the US Federal Reserve and the impact of the yuan devaluation by China, and the progress of monsoon rains before deciding to cut the benchmark lending rate in its next policy review meeting in September.
Policymakers, however, cited a 39.1% jump in indirect tax collection in July and a 37.6% surge since April to buttress the fact that the economy has turned the corner.
Chief economic adviser Arvind Subramanian said even without the additional revenue measures — including a hike in the service tax and excise duty rates — indirect tax collections rose 15.2% in July from a year before and by 14.6% during the April-July period.
“These collections indicate that the underlying momentum in the economy continues to improve across all sectors,” he said. He added that even real credit growth has started picking up after factoring in negative wholesale price inflation in the past eight months.