India CPI Inflation, IIP Growth Rate: Retail inflation surged to a near 8-year high of 7.79 per cent in April, persisting above the Reserve Bank of India’s (RBI’s) inflation target for the fourth straight month, data released by the National Statistical Office (NSO) showed Thursday.
High price levels of fuel and food items, especially of vegetables, spices and oils/fats, along with household services, contributed to the sharp rise in inflation, a level which is seen as being partly responsible for preempting the unscheduled repo rate hike of 40 basis points by the RBI last week.
The food price inflation (combined for rural and urban) surged to a 17-month high of 8.38 per cent in April from 7.68 per cent in March. Rural inflation rose to an 8-year high of 8.38 per cent in April, while urban inflation was at a 18-month high of 7.09 per cent. The previous high of the headline retail inflation was recorded at 8.33 per cent in May 2014.
Among states, the highest inflation rate was recorded by West Bengal, followed by Madhya Pradesh and Telangana. Core inflation — the non-food, non-fuel component of inflation — in April also touched a 95-month high of 6.97 per cent, remaining more than 5 per cent for 24 consecutive months.
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Experts said the base effect may moderate inflation levels in May but it is still expected to remain above 6.5 per cent, raising expectations of a back-to-back rate hike in the June monetary policy meeting of the RBI.
Inflation is being seen as posing the “biggest threat” to the economy and the RBI is looking at reversing all measures — liquidity infused and policy rate cuts — taken during the pandemic over the next 1-2 years along with measures to kill demand.
Why RBI may act
In anticipation of the inflation print, the rupee slipped to a record low, while stocks plummeted 2 per cent amid concerns that runaway prices may force RBI to tighten rates more aggressively. There could be back-to-back rate hikes in the next MPC meet in June.
“In the next 6-8 months, we will get inflation down by killing whatever little demand there is; this will happen the world over. All central banks including RBI are going to drive their economies into declining demand,” a source with knowledge of the development had said Wednesday. The RBI had reduced the repo rate by 115 bps in 2020.
Inflationary pressures are now seen getting generalised, with the segments of fuel and light, clothing and footwear showing an uptick. Transport and communication inflation increased to 10.91 per cent in April from 8 per cent in the previous month, with the second round impact of higher fuel prices also beginning to reflect in other goods and services. Inflation for miscellaneous goods and services jumped to a 115-month high of 8.03 per cent, marking 23 consecutive months of over 6 per cent inflation, as per India Ratings.
In April, cereals and products inflation touched a 21-month high of 5.96 per cent, vegetables inflation surged to a 17-month high of 15.41 per cent, and spices hit a 17-month high of 10.56 per cent. Pulses and products inflation moderated to 1.86 per cent in April from 2.57 per cent in the previous month.
“India Ratings has been pointing out for a while that inflation in health services is turning structural, as it has remained in excess of 6% for the last 16 months. Education inflation, although low, touched a 23-month high of 4.12% in April 2022… based on present trend, average inflation in FY23 is likely to be closer to 7% and may peak in September 2022, thereafter declining marginally. RBI has increased repo rate by 40 bps and CRR by 50 bps in May 2022. India Ratings expects monetary tightening to continue and expects repo rates to increase by 60-75 bps and CRR by 50 bps in FY23. However, Ind-Ra believes the future rate hikes will be data dependent,” Sunil Kumar Sinha, Principal Economist, India Ratings and Research, said.
In a separate dataset released by the NSO Thursday, industrial output for March showed a growth of 1.9 per cent, on a high base of 24.2 per cent in the corresponding period a year ago. Manufacturing output, which accounts for 77.6 per cent of the weight of the IIP, grew 0.9 per cent in March as against 28.4 per cent a year ago, while mining and electricity grew at 4 per cent and 6.1 per cent, respectively.
Among the use-based components of industrial output, four segments of primary goods (5.7 per cent), capital goods (0.7 per cent), intermediate goods (0.6 per cent) and infrastructure goods (7.3 per cent) recorded growth in March, while both consumer durables and non-durables recorded a contraction of 3.2 per cent and 5.0 per cent, respectively. For consumer durables output — indicator of consumption demand — this is the fifth straight month of contraction.
Experts said weak consumption demand is likely to witness more headwinds in the coming months. “Going forward, the surge in global commodity prices following the ongoing Russia-Ukraine conflict and the resultant rise in domestic inflation owing to a pass-through of higher input costs across several categories of goods is expected to impact consumption demand and thereby hurt the growth in the output of consumer goods. Further, protracted tensions could also impact corporate profits and dampen the investment climate, impacting the output of capital goods and infra/construction goods. Besides, the supply chain implications of the continued lockdowns in China along with geopolitical tensions will continue to impart downside risks for the output of sectors that are dependent on key raw materials provided by Russia, Ukraine or China,” Aditi Nayar, Chief Economist, ICRA, said.