Retail inflation surges again. May may have been an anomaly.

The Indian economy continued to display signs of resilience during the April-June quarter, kicking off the financial year with factory output scaling up to a seven-month high in May. But retail inflation reared up again, spiking to a four-month high in June and posing a challenge for policymakers in their quest to reduce interest rates.

Retail inflation based on the consumer price index (CPI) rose to 5.08% year-on-year last month, statistics ministry data showed, after having dropped to a 12-month low of 4.75% in May. The rise in June was due to higher food inflation, which accounts for nearly 40% of the consumer price basket.

Food inflation based on the consumer food price index (CFPI) rose 9.36% year-on-year in June, compared to a 8.69% rise in May and 8.70% in April.

“This is the first time in four months that the CPI inflation print has seen a significant sequential rise, largely driven by the increased food inflation,” said Suman Chowdhury, chief economist and head–research, Acuité Ratings & Research.

India’s retail inflation has been below the 6% mark since September, remaining within the central bank’s tolerance range of 2-6% for 10 consecutive months.

Core inflation, excluding the more volatile food and fuel and light groups, makes up nearly 50% of the basket.

A Mint poll of 18 economists had estimated retail inflation to rise to 4.9% in June from 4.75% the previous month, mainly due to higher vegetable prices.

Food inflation woes

Food prices have remained elevated for over a year—and have stayed above 8% since November—primarily due to last year’s uneven and below-normal monsoon rains.

The higher food inflation in June was because of the rise in prices of items such as cereals, vegetables, milk, and milk products.

“Vegetable prices have been particularly on fire (29.3% YoY) in June due to the continuing summer heat waves in some parts of the country,” said Chowdhury of Acuité Ratings. “While we expect the vegetable prices to cool down over the next 2-3 months with the progress in the monsoon, it is difficult to predict the trajectory of food inflation in India at this stage.”

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Among states, Delhi and Uttarakhand reported the slowest retail inflation, at 2.18% and 2.89%, respectively, for June, followed by Punjab (3.81%), Himachal Pradesh (3.86%), and West Bengal (4.03%).

However, 12 of the 22 states witnessed higher-than-average inflation, indicating retail inflation is still considerably high in several large states including Andhra Pradesh, Assam, Bihar, Karnataka, Odisha, Telangana, and Uttar Pradesh.

Inflation and RBI

Last month, the Reserve Bank of India left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take a while.

On Thursday, Shaktikanta Das, the RBI governor, said he expected retail inflation to be close to 5% in June, in line with the central bank’s expectations, but far from its 4% target to begin considering lowering interest rates, according to a Reuters report.

RBI last raised the repo rate to 6.5% in February 2023. It has been unchanged since.

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Regulating interest rates is a key instrument for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and the general public, which can, in turn, bring down consumer spending and inflation.

“Our broader thesis remains unchanged: the RBI’s policy outlook is still clouded by the heightened volatility in food prices,” said Sujan Hajra, chief economist and executive director, Anand Rathi Shares and Stock Brokers.

“We believe RBI will take note of this figure, and even if we see the headline print decrease in the coming quarter due to a higher base, the key point is uncertainty, which will likely delay a rate-easing cycle in India,” he added.

RBI’s medium-term target for CPI inflation is 4% within a band of plus or minus 2%.

Industrial output keeps pace

India’s factory output rose to a seven-month high of 5.9% in May, up from 5.41% in March and and 4.98% in April.

This uptick followed an eight-month low of 2.5% in November.

In financial year 2023-24, factory output expanded by 5.9%, slightly above the 5.1% growth in the year prior. 

“Particularly noteworthy was the double-digit expansion in electricity output for the second month in a row, which can be attributed to the increased power demand amid heatwave-like conditions across the country. Furthermore, growth in the manufacturing output improved to 4.6% in May compared to 3.9% in April,” said Rajani Sinha, chief economist at CARE Ratings Ltd.

“From the rural demand perspective, prospects of a good monsoon and beginning of kharif sowing auger well for the demand scenario. However, distribution of rainfall remains a critical monitorable,” Sinha added.

During May, manufacturing output rose 4.6% annually, mining by 6.6%, and electricity by 13.7%.

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Capital goods production, a proxy for fixed investments, saw a 2.5% annual rise in May, while consumer durables production, reflecting consumer sentiment, surged by 12.3%.

Industrial output growth rose steadily during the last year, managing impressive gains of 10.9% in August and 11.9% in October, driven by strong mining output, festive demand for manufactured goods, and increased electricity generation.

However, growth fell to its lowest point of the year at 2.5% in November.

Since then, industrial growth has shown signs of recovery.

GDP growth

India’s economy expanded at a blistering 8.2% in 2023-24, supported by a 7.8% increase in the January-March quarter, belying fears of a slowdown as manufacturing, electricity, and construction continued to fire on all cylinders.

The high growth in the fourth quarter meant the GDP growth recorded during FY24 beat the National Statistical Office’s forecast of 7.6% for the fiscal year.

For FY25, RBI's economic growth estimate stands at 7.2%.

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