Easing inflation, robust industrial output signals uptick in growth

Dataset released separately showed industrial output grew at 12.3 per cent in June, lower than 13.8 per cent a year ago and 19.6 per cent a month ago. The latest factory output print was higher than street estimates and was helped by a normalising base and strong growth in manufacturing, electricity and capital goods output, which point to a strengthening recovery.

Food inflation eased by 100 basis points to 6.75 per cent in July from 7.75 per cent in the previous month, mainly due to lower prices of vegetables, oils and fats, meat and fish. Cereals inflation, however, crossed the 6 per cent mark after a gap of 23 months. “Lower buffer stocks of wheat (as on July 1, 2022) has been translating into higher wheat prices. Moreover, 13 per cent lower area under paddy by end July 2022 compared to last year coupled with higher demand for PMGKY is also keeping pressure on cereals,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said.

The RBI is two months short of having to explain its failure to keep inflation under check. As per the mandate of the monetary policy framework, if the average inflation rate breaches the 2-6 per cent target for three consecutive quarters, the central bank will have to explain the reasons for breach in the inflation target to the government.

The inflation print in the coming months is expected to see an increase with the share of services expected to see an uptick, experts said. “Given the base effects, we caution that the next two CPI inflation prints could rise slightly from the 6.7 per cent seen in July 2022, in spite of which we believe that the average inflation for the ongoing quarter will modestly trail the MPC’s projection of 7.1 per cent. Fears of a global recession and fresh geopolitical uncertainties have led to a correction in commodity prices from the peaks seen in mid-June 2022, which bodes well for easing domestic input cost pressures and the core-CPI inflation in the next few months. In contrast, the robust domestic demand for services poses risks, given its significant share in the CPI basket (services: 23.4 per cent), and hence, remains a key monitorable, along with the significant lag in kharif sowing of rice,” Aditi Nayar, Chief Economist, ICRA said.

Rural inflation (6.80 per cent) continued to be higher than urban inflation (6.49 per cent) in July even as it moderated from the previous month. In June, rural inflation was at 7.09 per cent, while urban inflation was at 6.86 per cent. Among states, the highest inflation rate was recorded by Telangana at 8.58 per cent, followed by Assam at 7.91 per cent and Gujarat at 7.85 per cent.

In July, food and beverages inflation stood at 6.71 per cent as against 7.56 per cent in the previous month. Vegetables and oils and fats inflation stood at 10.90 per cent and 7.52 per cent, respectively, as against 17.37 per cent and 9.36 per cent earlier. Cereals and products inflation was at 6.90 per cent in July, up from 5.66 per cent in June. Fuel and light inflation was at 11.76 per cent in July, up from 10.39 per cent in June, while clothing and footwear inflation was at 9.91 per cent in July, up from 9.52 per cent in June.

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In the factory output data released by the NSO, manufacturing sector output, which accounts for more than three-fourth of the total weight of the Index of Industrial Production, rose 12.5 per cent, while electricity output grew at 16.4 per cent in June. Capital goods output grew 26.1 per cent, signalling higher capex. Consumer durables and nondurables posted a growth of 23.8 per cent and 2.9 per cent, respectively, in June after being in the negative zone for most of last year.

“The double-digit yoy growth of 12.7 per cent in Q1 FY23 is indicative of industrial recovery remaining on course despite global headwinds/ uncertainty… the healthy growth in capital and infrastructure goods is encouraging, signalling revival in investment activity on the back of capex push by the Union government (Government capex in Q1 FY23 grew 57.01 per cent YoY). The consumer non-durables sector is expected to witness a moderate recovery going forward given the progression of monsoon so far in the country. The rebound in this segment is important for a durable and sustained industrial recovery which so far has been witnessing a K-shaped recovery (tepid growth in consumer non-durables and high growth in consumer durables segment),” Sinha said.