New Delhi: In a double whammy of sorts for the Indian economy, retail inflation accelerated to seven per cent in August. The retail inflation was driven by high food and fuel costs, while factory output plunged to a four-month low of 2.4 per cent. The reversal of a three-month declining trend in CPI inflation will put pressure on the Reserve Bank of India (RBI) to again raise interest rates to tame prices, which have stayed above the comfort zone for the eighth month in a row.
CPI inflation climbed to 7 per cent from 6.71 per cent in July and 5.3 per cent in August 2021, official data released Monday showed.
A sharp increase in cereals and vegetable prices owing to erratic monsoon impacting production was the main reason. While the country was already facing double-digit wheat inflation due to unexpected heat wave pulling down the output, a lower area sown under paddy due to the shortfall in monsoon rainfall is expected to reduce the rice output. The twin effect of this means inflation in cereals will remain at elevated levels.
This is the second instance since RBI adopted the inflation targeting approach that the retail inflation has breached the upper tolerance limit of six per cent for eight consecutive months – the earlier instance was from April 2020 to November 2020.
Separately, the Index of Industrial Production (IIP) for July 2022 recorded a tepid year-on-year growth of 2.4 per cent, falling sharply from 12.7 per cent in June.
The manufacturing sector grew by 3.2 per cent (a four-month low) and the electricity sector by 2.3 per cent (a six-month low). Mining sector witnessed a contraction of 3.3 per cent in July 2022 after a gap of 16 months despite the coal output increasing by 11.4 per cent in the same period.
Rumki Majumdar, economist, at Deloitte India said the CPI and IIP data show just how much work the RBI has to do. “The challenge is that the RBI is faced with a difficult balancing act, needing to raise interest rates aggressively to control inflation without impacting the recovery,” Majumdar said.
While Icra chief economist Aditi Nayar said the CPI inflation print is expected to rise slightly to 7.1 per cent in September, India Ratings said retail inflation will fall below 6 per cent only by January next year.
“We expect inflation to ease in 2023, with an improved supply side situation and global economic weakening leading to falling energy prices,” Majumdar pointed out.
The government has already announced restrictions on the export of wheat flour and more recently for rice which should stem domestic price pressures.
“The outlook continues to be uncertain due to cereal inflation, weakness in the currency, elevated global commodity prices, pick-up in services demand and revision of natural gas prices in 2HFY23 (due in October 2022),” India-Ratings said expecting a 25-50 basis points increase in interest rates at the RBI’s monetary policy review due later this month.
Inflation had touched a high of 7.79 per cent in April before decelerating to 6.71 per cent in July. The government has tasked RBI to ensure CPI inflation remains at 4 per cent with a margin of 2 per cent on each side.
