Home / Politics / Policy /  Retail inflation hits 7-month high in May at 3.05%; April IIP rises to 3.4%

New Delhi: India’s factory output picked up in April to hit a six-month high, while retail inflation accelerated at the fastest pace in seven months in May, but still within the central bank’s tolerance level and leaving scope for more rate cuts.

Data released by the National Statistical Office showed index of industrial production (IIP) expanded at 3.4% in April from 0.3% a month ago, while retail inflation quickened to 3.05% in May from 2.99% in the previous month.

Analysts, however, said it is too early to celebrate the recovery in factory output given the inherent volatility in some of the components such as capital goods, which turned positive in April at 2.5% after a gap of four months.

Madan Sabnavis, chief economist at CARE Ratings Ltd, said that though the IIP print is impressive, it is too early to extrapolate the same for the year as the base effect would be playing a role till October or so, a period in which growth rates were high last year. “Consumer goods have witnessed reasonable growth of 2.4% (durable) and 5.2% (non-durable). But caution must be exercised as this cannot be interpreted as a revival in consumption spending as the auto data released so far is not encouraging," he added.

Passenger vehicle sales in India posted the steepest drop in nearly 18 years in May amid weak demand and a liquidity crunch faced by non-bank vehicle financiers, prompting major auto makers to cut production.

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Sales fell 20.6% in May to 239,347 vehicles from a year earlier, according to data released on Tuesday by the Society of Indian Automobile Manufacturers.

Last week, the Reserve Bank of India (RBI) cut policy rates for the third consecutive time by 25 basis points and changed its stance to accommodative from neutral, signalling more rate cuts were in store to revive growth momentum and support faltering consumer demand.

India’s economy slowed to a near five-year low of 5.8% in the March quarter, forcing RBI to revise its growth projection for 2019-20 to 7% from 7.2% estimated earlier. RBI said it expects economic growth at 6.4-6.7% from April to September, accelerating to 7.2-7.5% during the October-March period. In 2018-19, India’s economy grew at 6.8%.

“Growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern," the monetary policy committee of RBI said in its statement.

Sunil Kumar Sinha, principal economist at India Ratings, said RBI might continue to pursue a policy that would be supportive of growth. “Although the impact of monetary policy is felt with a lag, India Ratings believes there is still a scope of one more rate cut in 2019-20. However, besides being dependent on data, RBI will take into consideration fiscal policy stance of the government," he said.

Finance minister Nirmala Sitharaman will present her maiden budget on 5 July.

The pickup in retail inflation came on the back of an 11-month high in vegetable inflation at 5.5%, even as core inflation slowed to a 23-month low of 4.37%.

“This indicates demand conditions have weakened considerably. Even services inflation, a major driver of retail inflation in the second half of 2018-19 has slowed down considerably," said Sinha.

India Meteorological Department has projected normal rainfall during the south-west monsoon this year, which provides over 75% of the rainfall to the entire country.

Monsoon rains made a delayed onset over Kerala on 8 June, against its normal date of 1 June.

“Given the delay in monsoon and drought conditions in Maharashtra, the progress is important as food inflation has started to increase and can become sharp in case of specific crop failures, especially pulses and oilseeds," said Sabnavis.

RBI has raised its inflation forecast for the April-September period of 2019-20 to 3-3.1% from its earlier projection of 2.9-3%.

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