India’s factory output accelerated and inflation
remained largely stable, keeping the hopes of a further rate cut alive towards
the deep end of the current year.
Consumer
inflation remains stable....
The country’s consumer inflation, which
is the guiding factor for the monetary policy stance, stood at 5% in May as
against 4.9% a month earlier. While the core CPI (which excludes food and
energy prices) inched up to 4.6% (from 4.3% in April), prices of food and
beverages turned cheaper at 5.1% (against 5.4% in previous month).
Price levels in major categories such as
meat and fish, fruits, vegetables and milk products stood at 5.4%, 3.8%, 4.6%
and 7.4% respectively. Two major outlier groups are pulses and products, and
sugar and confectionery. While the inflation in cereals rose sharply to 16.6%
(and has been in double digits for four months in a row now), for the latter
category it stood at -7.3% (and has consistently been in the negative territory
for most of the past year).
The Reserve Bank of India (RBI), which wants to contain retail inflation below 6% as of January 2016, in its latest monetary policy statement, flagged the possibility of a rebound in crude prices and an adverse impact of a deficient monsoon on farm production as some of the key risks going ahead. A dry spell could fan food inflation, strain household budgets, hamper non-food spending and in process could make it tougher for the RBI to cut rates any further to juice up growth. However, the government has assured that it has enough strategic stockpiles to contain any food price shock, and as a pre-emptive measure is ready to provide high-yielding seeds for replanting of crops. Consequently, in all likelihood, the inflation pressure will be contained below 6% in the current fiscal year.
Factory
output growth accelerates….
Industrial output growth accelerated to
4.1% in April, primarily driven by the manufacturing sector that grew at 5.1%
as against 2.2% in March. Of the other two sectors mining and electricity, while
the former registered a growth of 0.6%, there was a negative growth of 0.5% in
the case of latter.
According to the use-based
classification, growth in capital goods continued to be strong at 11.1% while
consumer good returned to the positive territory with a growth figure of 3.1%.
Growth in the latter segment had been precariously negative since January last
year, with the exception of May 2014, which reflected the reluctance among
consumers to spend. However, on a brighter note, capital goods, indicative of
investment demand in the economy, rose for the sixth month in a row, indicating
a scale up in production on hopes of stronger demand as the economy gathers
momentum. Growth in other two categories, basic goods and intermediate goods,
remained tepid at 2.8% and 3.3% respectively. The improved investment sentiment and
stable inflation augers well for the economy that is expected to have grown
7.5-8% in the fiscal year 2016.
Further
rate cut in the immediate future unlikely….
The positive surprise seen in the IIP data
corroborates with the solid indirect tax growth figures released by the finance
ministry, and thus reaffirms the view that a significant pick-up in economic activity is in the
offing. However, a lot depends on how the monsoon unfolds. Approximately, 55%
of India’s farmlands depend on monsoon rains and food prices constitute almost
50% of the CPI basket. Thus, the rainfall, its impact on food prices, direction
of crude prices, and finally Fed action of interest rates are some of the
potential risks that eliminate any space of an immediate rate cut in next
couple of months.
Although there is a declining
correlation between monsoon deficits and food inflation (2014 being a case in point wherein despite deficient monsoon food prices remained under control owing to timely government intervention), the central
bank at the this juncture would rather wait and watch as to how the scenario
pans out before deciding on any further action with respect to the interest
rate.
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