Retail inflation eases, factory output ticks higher in May, boosting Indian economy

  • Retail inflation, while above the central bank's target of 4%, has stayed within the tolerance range of 2-6% for nine consecutive months.
  • Last week, the RBI left policy rate unchanged at 6.5%, signalling that interest rate cuts may take more time as the central bank waits for inflation to stabilize.

Rhik Kundu
First Published12 Jun 2024, 07:42 PM IST
India's economy expanded at a blistering 8.2% in FY24, supported by a 7.8% increase in the January-March quarter. (File Photo: Mint)
India’s economy expanded at a blistering 8.2% in FY24, supported by a 7.8% increase in the January-March quarter. (File Photo: Mint)

The Indian economy displayed signs of resilience in the early months of FY25, clocking greater factory output and a marginal fall in retail inflation.

Retail inflation based on the consumer price index (CPI) fell to 4.75% in May from 4.83% in April, touching the lowest in a year, statistics ministry data showed. The moderation was aided by slower rise in prices of food items such as meat, fish, milk products, vegetables, and spices. Inflation has stayed below below 5% since March.

A Mintpoll of 15 economists had estimated retail inflation to fall to 4.8% in May.

Food inflation, which accounts for nearly 40% of the overall consumer price basket, rose 8.69% year-on-year in May, compared with 8.70% in April. Food prices have remained elevated for over a year now, primarily due to last year's uneven and below-normal monsoon rains. Food inflation has consistently stayed above 8% since November.

Read This: Why vegetable prices are burning a hole in your wallet

Retail inflation, while above the central bank's target of 4%, has remained within the tolerance range of 2-6% for nine consecutive months.

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

“Core inflation continued to remain benign and moderated further to 3.1% in May. However, high inflation in the food basket, especially in specific categories like vegetables and pulses, remains a concern,” said Rajani Sinha, chief economist at CareEdge.

Inflation and the RBI

Last week, the Reserve Bank of India (RBI) left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take more time. RBI governor Shaktikanta Das had noted the "last mile journey towards a 4% inflation target remains sticky," indicating that the central bank would wait for inflation to stabilize around 4% before taking policy action. However, two of the monetary policy panel members sought a rate cut and a change in monetary stance.

More Here: What will the rising mercury this summer do to Indian inflation?

RBI last raised the repo rate to 6.5% in February 2023, and has left it unchanged since then.

 

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.

Industrial output keeps pace

Meanwhile, factory output rose 5% in April, marking a steady climb from 4.9% in March and 5.6% in February. This uptick followed an eight-month low of 2.5% in November. Over the April-March (FY24) period, factory output expanded by 5.9%, slightly above the previous year's 5.2% growth.

“In terms of use-based classification, the infra and primary goods segments witnessed steady growth due to the infra activity going on…Consumer durables demand may be attributed partly to rural spending as well as wedding season where people tend to buy more of these goods in April-May,” said Madan Sabnavis, chief economist at Bank of Baroda.

In April, manufacturing output rose 3.9% annually, mining by 6.7%, and electricity by 10.2%.

Capital goods production, a proxy for fixed investments, saw a 3.1% annual rise in April, while consumer durables production, reflecting consumer sentiment, surged by 9.8%.

Industrial output growth, which was at 4.61% in April 2023, had managed 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 dipped to its lowest point of the year at 2.5% in November.

Since then, India's industrial growth has shown signs of recovery.

Growth and variations

India's economy expanded at a blistering 8.2% in FY24, 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 actual GDP growth recorded during FY24 beat the National Statistical Office forecast of 7.6% for the last fiscal.

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

Meanwhile, among states, Delhi and Uttarakhand reported the slowest retail inflation at 1.99% and 3.37%, respectively, during May, while Odisha (6.25%), and Karnataka (6.11%) recorded the fastest price rice.

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

Also Read | The spoilers that lie ahead: What ails India’s rosy growth story

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First Published:12 Jun 2024, 07:42 PM IST
HomeEconomyRetail inflation eases, factory output ticks higher in May, boosting Indian economy

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