New Delhi: India’s retail inflation quickened to a five-month high of 3.85% in March on the back of higher fuel prices, erasing any hope of a rate cut by the central bank in the near future.
Factory output surprisingly contracted 1.2% in February leaving economists perplexed.
Retail fuel inflation accelerated to 5.56% in March from 3.9% in the previous month even as food prices rose 1.93%, slower than the 2.01% increase in the previous month. Inflation excluding food and fuel has exhibited persistence and has been significantly above headline inflation since September 2016.
Though inflation remains within the comfort zone of the Reserve Bank of India (RBI), upside risks remain, said Crisil chief economist D.K. Joshi.
In its monetary policy review on 6 April, RBI said that headline retail inflation is set to undershoot the target of 5% for the March quarter in view of the sub-4% readings for January and February. For 2017-18, RBI projected inflation to average 4.5% in the first half of the year and 5% in the second half of the financial year.
The central bank said risks are evenly balanced around the inflation trajectory at the current juncture. The risks arise from uncertainty surrounding the outcome of the southwest monsoon in view of the rising probability of an El Niño event around July-August, and its implications for food inflation as well as rising commodity prices. On the positive side, a significant increase in procurement as a result of estimated record production of foodgrain last year is expected to rebuild buffer stocks and mitigate food price stress, if it materializes.
After the government’s shock withdrawal of high-value banknotes in November last year, IIP contracted in December but picked up in January because of a positive base effect.
“There is huge amount of volatility in the IIP. There is more noise than signal of economic significance in IIP now. We should not read too much into it. It doesn’t capture the ground reality,” Crisil’s Joshi said. He said it is difficult to link February’s IIP underperformance to demonetization four months after the event.
“Concerns on the growth front will dissuade the central bank from raising policy rates anytime soon,” he added.
A Reuters poll of economists had projected IIP at 1.3% in February and retail inflation at 3.98% for March.
The items that significantly contributed to the negative IIP include sugar, cement, plastic machinery, pan masala and aluminium conductor. In terms of industries, 15 out of the 22 industry groups in the manufacturing sector contracted in February as compared with the corresponding month of the previous year.
Capital goods, which is used as a proxy for investment demand in the economy, contracted 3.4% after a month of positive growth. Production of both consumer durables (-0.9%) and consumer non-durables (-8.6%) shrank, indicating volatile demand conditions for consumer goods.
Sales of domestic passenger vehicles have shown signs of recovery with 9.96% growth in March, the third straight month of positive growth. Sales grew 9.01% in February, bouncing back from the impact of demonetization, according to data provided by the Society of Indian Automobile Manufacturers.
A business outlook survey by the Confederation of Indian Industry released on Sunday was bullish about economic recovery while another survey by Federation of Indian Chambers of Commerce and Industry released on Tuesday was less sanguine.