Rise in inflation, industrial production likely to spur more RBI rate hikes

New Delhi: India’s retail inflation in May rose to a four-month high of 4.87%—courtesy costly petrol and diesel, and a weak rupee—while industrial production recovered marginally to grow at 4.9% in April, data from the Central Statistics Office (CSO) showed on Tuesday. This, after the Reserve Bank of India (RBI) on 6 June raised repo rate by 25 basis points to 6.25%—the first rate hike in over four years.

One basis point is one-hundredth of a percentage point.

While manufacturing grew at a robust 5.2%, slow electricity generation (2.1%) dragged down overall growth in the index of industrial production (IIP), CSO data showed.

Inflation concerns

At 4.87%, retail inflation in May was marginally higher than RBI’s revised inflation projection of 4.85% for April September. The central bank has forecast retail inflation at 4.7% in October-March period, “with risks tilted to the upside”. Annual retail food inflation, which contributes about half of the weight in the consumer price index (CPI), remained muted, helped by forecast of a normal monsoon this year. It increased 3.1% in May compared with a 2.8% rise in the previous month.

Analysts polled by Reuters had forecast May’s annual increase in the consumer price index (CPI), used to measure retail inflation—at 4.83%, compared with April’s provisional 4.58%. The forecast for May ranged from 4.1% to 5.7%. May was the seventh straight month in which inflation was higher than the RBI’s medium-term target of 4%.

“Inflationary pressures are building up in the economy,” said Tushar Arora, senior economist at HDFC Bank. “The possibility of one more rate hike cannot be ruled out this year.”

According to ICRA Ltd’s principal economist Aditi Nayar, “The uptick in headline and core CPI inflation is in line with our forecast, reflecting an unfavourable base effect for food prices and higher inflation for fuel and light as well as transport and communication, mirroring the hardening of crude oil prices. Headline inflation remains on track to cross 5% in June 2018.

“As expected, mining and manufacturing drove the uptick in IIP growth in April 2018. The rebound in capital goods to a double-digit growth was driven by a favourable base and the performance of commercial vehicles.”

According to Rupa Rege Nitsure of L&T Finance Holdings, “The growth inflation dynamics have not changed much. CPI has continued its northward journey and core inflation crossing 6% is a warning for the Reserve Bank of India. Future monetary policy actions would depend on the progress of monsoons, oil price movement and fiscal slippage. I expect at least two more rate hikes during FY19.”

Rising oil prices

Oil is India’s biggest import and an increase in oil prices raise push inflation up and widen the trade deficit, putting pressure on the rupee. So far in 2018, petrol prices have climbed 9.2% and diesel by 13.7% in Delhi.

The rupee has depreciated 5.3% since 1 January, pushing up the prices of imported items such as electronic goods and machinery.

The International Monetary Fund (IMF) expects India’s economic growth could rebound to 7.4% in 2018-19, from an estimated 6.7% in the previous fiscal year. “Over the medium-term, growth is expected to gradually rise with continued implementation of structural reforms that raise productivity and incentivise private investment,” it added.

Asian Development Bank and World Bank have projected the Indian economy to grow at 7.3% during the year. In 2017-18, the economy is estimated to have grown at 6.6%.