Factory output contracts, retail inflation jumps

Retail inflation quickened in February and factory output shrank in January, crimping the central bank’s scope to boost economic growth by keeping interest rates low.

Data released by the statistics department on Friday showed the Index of Industrial Production (IIP) contracted 1.6% in January after registering growth in December. Meanwhile, the Consumer Price Index, or CPI-based retail inflation accelerated in February to 5.03% after falling to a 16-month low in January, as the pace of food and fuel price rises accelerated to 3.87% and 3.53%, respectively.

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Core inflation hardened to a three-month high of 5.7% in February from 5.5% in the previous month, indicating that an uptick in commodity prices and greater pricing power will sustain inflationary pressures.

This is the last set of retail inflation data before the Reserve Bank of India (RBI) and the finance ministry announce a fresh inflation targeting framework in April. The central bank has supported maintaining the existing inflation target of 4% within a band of 2 percentage points.

Inflationary pressures are likely to rule out further rate cuts unless taxes on fuels are cut to a sizeable extent, said Aditi Nayar, principal economist at ICRA Ltd.

“We expect CPI inflation to rise further in March before recording a base effect-led dip in April, reflecting the impact of the spike in inflation during the lockdown,” she added.

The central bank’s latest monetary policy in February had cautioned that the slowing of inflation could be short-lived with increased pass-through to output prices as demand normalizes and firms regain pricing power.

It marginally raised the inflation forecast to 5-5.2% from 4.6-5.2% for the first half of the next fiscal year while drawing comfort from slower food inflation.

Madan Sabnavis, chief economist of Care Ratings, said the major disappointment in IIP is the decline in consumer goods output, which was expected to be positive.

“We had expected a positive turn to come from consumer goods, which was not the case. The pent-up demand story has quite clearly paused,” he added.

Both consumer durables and consumer non-durables contracted 0.2% and 6.8%, respectively, in January, while capital goods shrank 9.6% during the month.

The Organization for Economic Co-operation and Development (OECD) on Tuesday projected the Indian economy to expand at 12.6% in FY22, the highest among G20 countries.

The economy expanded 0.4% in the December quarter to emerge from a pandemic-induced recession and is now projected to contract by a record 8% in fiscal year 2021.