Retail inflation eases to 6.71% in July, but still far from RBI’s target; IIP grows 12.3% in June

India's retail inflation eased in July to 6.71% due to moderation in food inflation, but stayed well above the Reserve Bank of India's tolerance limit of 4-6% for the seventh consecutive month, data from the National Statistical Office showed Friday.

Food inflation in July 2022 moderated to 6.75% as against 7.75% in June, according to the data.

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

Meanwhile, India's factory output, measured by the Index of Industrial Production (IIP), came in at 12.3% for the month of June, compared with 19.6% reported in May, the government data has showed. The coronavirus pandemic had weighed on Industrial production since March 2020, when it had contracted 18.7%.

The manufacturing sector's output grew 12.5% in June 2022. The mining output climbed 7.5%, and power generation increased 16.4% in June this year.

The IIP had grown by 13.8% in June last year.

The index rose 12.7% April-June 2022 compared to a growth of 44.4% in the same period a year ago.

Industrial production shrank 57.3% in April 2020 due to a decline in economic activities in the wake of the lockdown imposed to curtail the spread of Covid-19.

Kunal Kundu, India Economist, Societe Generale, Benhaluru, said, "Inflation coming in slightly lower than our and market expectation suggests expectation of continued price pressure is not unfounded."

"As things stand now, headline inflation appears to be in line with our FY23 expectation of 6.5% y-o-y. While food inflation eased a tad, core inflation inched up and topped 6.0%, an indication of persistence of price pressure suggesting a rather slow pace of easing of headline inflation."

"We do see inflation easing adequately in 2023 and stick to our expectation of one final rate hike of 35bp by RBI during October."

Upasana Bhardwaj, Chief Economist, Kotak Mahindra Bank, Mumbai, said, "CPI headline inflation for July has moderated in line with our expectations, led largely by food inflation, while the core inflation remains elevated and sticky."

"The coming few readings are expected to be a tad above 7% with inflation likely to hover above RBI's upper threshold limit of 6% until January 2023. We expect Repo rate at 6% by end of 2022, followed by a pause and a shift to neutral policy stance."

Sreejith Balasubramanian, Economist, IDFC AMC, Mumbai stated, "July headline CPI of 6.7% y/y was down from 7% in June and was primarily driven by much lower momentum in food prices as expected. Sequential momentum in core inflation was higher from last month but eased year-on-year."

"While real-time prices of edible oils continue to ease till date in August, that of cereals (rice and wheat), pulses and some vegetables have started to move up. Food inflation alongside crude oil price and pass-through of costs by producers would define inflation in the near term while growth and supply chain pressures in the medium term."

Economists polled by Reuters expected July inflation to come in at 6.78%, from 7.01% in June.

Food prices account for nearly half of the consumer price index basket. Earlier this month, the RBI had raised repo rate by 50 basis points to 5.40%, taking it above where it was before the pandemic. 

The RBI had also retained inflation forecast for FY23 at 6.7% amid uncertain price trajectory on "geopolitical shocks" and on hope that inflationary pressures would ease with pick-up in kharif sowing and supply chain improvements. 

In its previous monetary policy review in June, it had projected retail inflation for 2022-23 at 6.7%, higher from 5.7% forecast in April.

With agency inputs