Home >Markets >Mark To Market >Lacklustre inflation and IIP data to make way for further interest rate cuts

MUMBAI: There isn’t much for investors to look forward to as far as the upcoming inflation and industrial production data is concerned. While inflation measured through the consumer price index (CPI) could inch up in June, wholesale inflation is seen remaining in the negative territory.

"We think India will be able to publish a detailed headline CPI number for June, which we expect to come in at 5.4%, a slight increase m/m, albeit the past couple of inflation prints have been partial," Rahul Bajoria, chief economist at Barclays, said in a note on 8 July. Given the lockdown, headline CPI data for May and factory output data for April were not released.

This surge in retail inflation would be driven by seasonally high food prices and higher tax on fuel. Food inflation in May rose 9.28% year-on-year, as per government data.

“Once the lockdown is lifted, pent-up demand may lead to an uncertainty in price levels, particularly in the core inflation category of the CPI. The current level of retail food inflation, which is ruling high since the last few months, is likely to remain sticky at this level for at least the first half of the current fiscal due to supply disruptions and low base effect. Amid the ongoing border dispute between India and China, coupled with supply disruptions of imports, a rise in the cost of imported goods from other countries could also stimulate additional inflationary pressures," Brickwork Ratings said in a report on 8 July.

On the bright side, monsoon is expected to be bountiful this year, which could help bring down the pressure on food prices to some extent.

Meanwhile, the index of industrial production (IIP) data for May is expected to see a decline as economic activity was largely muted.

“IIP may decline by around 40% year-on-year (y-o-y) in May. Core infrastructure industries output declined by 23.4% y-o-y in May’20, an improvement from the 37% decline in the previous month. The sharpest recovery was seen in cement output, which declined by 22.2% y-o-y in May’20 after declining by 85.2% in the previous month. Fertiliser production turned positive and was up 7.5% y-o-y, reflecting strong rural demand," Teresa John, economist at Nirmal Bang Institutional Equities Ltd said in a report on 8 July.

With that, the Reserve Bank of India is expected to continue to focus on growth rather than worry about inflation. So, economists foresee another 50-60 basis points rate cut for the remainder of the fiscal. One basis point is one hundredth of a percentage point. The central bank has trimmed the repo rate by 40bps, bringing the benchmark lending rate to the lowest level of 4%.

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