Retail inflation down, weak industrial growth continues

New Delhi: India's annual retail inflation eased by 100 basis points to 5.05 per cent in August, but factory output again dipped to a negative growth of (-)2.4 per cent in July from an expansion of 1.95 percent in the moth before, official data showed on Monday.

Representational image. AFP

Representational image. AFP

The fall in retail inflation, as per data released by the Central Statistics Office (CSO), was thanks to a rather sharp drop in the annual food inflation -- from 8.35 percent in July to 5.91 per cent in August.

Richa Gupta, Senior Economist, Deloitte India says, "Growth numbers on the industrial production have disappointed by showing a contraction albeit on the back of the volatile capital goods numbers. The manufacturing sector has contracted by 3.4 percent in July essentially on the back of the volatile cable, rubber insulated category . However, data shows that electricity and mining growth were also weak during the month.

"Basic goods and intermediate goods production continued to expand while consumer durables did well registering an expansion of 5.9 percent. As such, industrial growth continues to remain weak and we are likely to see growth numbers in low single digit territory. That said, there could be some divergence in performance under the new series thAs far as the factory output is concerned, the drag was due to a negative growth of (-)3.4 per cent in the manufacturing sub-index, which enjoys the maximum weight in the main index, even as the growth rates in mining and electricity indices were also modest."

In May the factory output was up 1.1 per cent, while in April it took a hit of (-)1.4 per cent. In July last year, there was a growth of 4.3 per cent. Cumulatively, the growth during the first four months of this fiscal is at (-)0.2 per cent.

This being the last set of data release on retail inflation and industrial production, ahead of the next bi-monthly monetary policy update due on October 4, expectations have risen sharply on possible interest rate cut.

This, also because the annual retail inflation that was above the upper tolerance level of six per cent in July, has since come down by 100 basis points, even though it is still above the base rate of four per cent.

The government target is four per cent plus or minus two percentage points for the next five years.

"Retail inflation has fallen dramatically and will possible reinforce expectations of some more easing in the coming months. While a fall in inflation was expected, the extent has been more than anticipated as vegetable prices have shown a sharp correction. Importantly, prices of pulses have also come down showing that the supply side measures undertaken by the authorities is having a dampening effect.

"Core inflation has remained broadly stable exhibiting the fact that there possibly wasn’t much change in the demand conditions in the economy. The next few prints will be important from a policy standpoint as the central bank would like to assess if this fall is durable and the possibility of achieving its target of 5 percent by March 2017. The chance of another rate cut has increased and may to happen by the end of the year," said Rishi Shah, economist, Deloitte India

(With inputs from agencies)

Updated Date: Sep 13, 2016 08:46 AM

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