India’s retail inflation quickens to 7% in August; IIP growth eases to 2.4%

Food inflation, which accounts for nearly half the CPI basket, soared 7.62% in August 2022 as against 6.75% in July, according to the data released by the National Statistical Office on Monday.

Despite India restricting wheat flour exports towards the end of August, inflation touched 7% in August. This may add pressure on the central bank to hike interest rates more aggressively in the coming months to tackle elevated inflation.

Meanwhile, industrial growth, as measured by the Index of Industrial Production (IIP), tumbled to 2.4% in July as compared to 12.3% in June.

Aditi Nayar, Chief Economist at ICRA said, “The IIP growth plunged to a four month low of 2.4% in July 2022, trailing our expectation of 4%, an unfortunate but expected fallout of the base normalisation, heavy rainfall in some areas, and the shift in discretionary consumption to contact-intensive services.”

The manufacturing sector’s output grew 3.2% in July 2022. The mining output contracted 3.3% while power generation increased 2.3% during the same period.

“The sharp YoY contraction in mining output in July 2022 was a surprise, given the double-digit growth in coal output, and is likely to have been led by the excess rainfall seen during the month. Industrial output was only 2.1% higher than pre-Covid levels of July 2019, with the consumer durables and non-durables segment lagging their pre-Covid levels by 6.8% and 2.5%, respectively,” Nayar said.

RBI on key policy rate

The central bank has hiked key policy rate by 140 basis points in May-August, returning borrowing costs to pre-pandemic levels. The RBI’s next policy decision is due on 30 September. The central bank expects inflation to average 6.7% in the year to March.

In the first three months of the current fiscal, retail inflation remained above 7%.

Indian government bond yields ended marginally higher today, ahead of the key retail inflation data. The benchmark 10-year bond yield ended at 7.1811%, compared with 7.1699% in the previous session.

Global commodities prices are seeing a moderation amid fears of a slowdown caused by a US Federal Reserve-led monetary policy tightening.

Despite the recent moderation, the RBI is expected to hike the repo rate by another 60 basis points through the end of March to 6.00% from a pandemic-era record low 4.00%, a separate Reuters poll showed.

Analysts view

Analysts had predicted annual inflation of 6.9% in August, compared with 6.71% the previous month.

Vivek Rathi, Director-Research Knight Frank India, said, “Inflation levels in the economy remain elevated despite a considerable reduction in crude oil price from its recent highs. Rise in food prices, domestic fuel price level and pressure on the Indian currency continue to pose near term threat on inflation trajectory. These will also guide the upcoming monetary policy action, which has so far already witnessed three policy rate hikes and liquidity tightening measures over last 5 months.”

“However, the strong sentiment on both the business and consumer fronts highlights the economic resilience, which domestic and global business participants are expected to take note of for their India plans,” Rathi said.

Kunal Kundu, India Economist, Societe Generale, Bengaluru stated, “Another inflation print of 7% bang in line with our expectation confirms our belief that price pressure is not going to go away anytime soon, although being a year-on-year print, inflation may be off the peak.

“Expectedly food prices moved up sharply as well. Given the tailwind generated by high food prices as production suffers due to erratic monsoon, we do not see consumers’ cup of woes emptying out soon.

“We expect an additional 60 bps rate hike by the Reserve Bank of India (RBI) before they bring the rate hike cycle to an end as they shift the focus back to growth given the rather dismal employment situation.”

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