New Delhi: India’s factory output growth slowed to a seven-month low in May while retail inflation quickened to a five-month high in June, signalling a worsening macro-economic environment.
Data released by the statistics department showed the index of industrial production (IIP) grew at 3.2% in May compared with a revised 4.8% growth a month ago while Consumer Price Index (CPI) based inflation accelerated by 5% in June against 4.87% in the preceding month.
A surge in crude oil prices, weakening rupee and increase in minimum support price (MSP) of summer-sown crops by the government are further expected to put upward pressure on retail inflation.
India Ratings and Research estimates the hike in MSP for the 2018-2019 season will push up retail inflation by 70 basis points. One basis point is one-hundredth of a percentage point.
While the monsoon has gained pace earlier than expected, nationwide rainfall deficit in the season stands at 8% till Thursday. Although the India Meteorological Department has projected a normal monsoon, its distribution and intensity in July will be crucial for kharif output, which in turn will impact food inflation.
The Reserve Bank of India (RBI) on 6 June raised the repo rate by 25 basis points to 6.25%—the first rate hike in more than four years—and analysts do not rule out a further hike next month in its policy review on 1 August.
“RBI would be watching the CPI print closely and an adverse report on monsoon or a further spike in oil prices could hasten a rate hike in the coming policy. Otherwise it would be a pause followed by a rate hike towards the end of calendar 2017," said Madan Sabnavis, chief economist at Care Ratings Ltd.
Slowing IIP growth was led by the manufacturing sector despite electricity and mining output growing faster than in April. Ten out of the 23 industry groups in the sector showed negative growth, indicating the broad-based nature of the slowdown.
Srishti Choudhary contributed to this story.