CPI inflation pegged at 6.8-7.25% in June; IIP growth at 14.5-24% in May

According to MPC's own projections, the inflation rate may not come down below 6% on average before the fourth quarter of the current financial year

The retail price inflation may have stood in the range of 6.8-7.25 per cent in June against 7.04 per cent in the previous month, according to projections made by economists and experts. This is despite a slew of measures taken by the government to ease the price pressures.

On the other hand, industrial production growth is likely to have zoomed up by at least an 11-month high of 14.5-24 per cent in May against 7.1 per cent in the previous month. However, the climb would represent just a statistical illusion rather than a real growth. 

Both the numbers — the retail price inflation for June and industrial production for May — are slated to be released this evening.  

Of nine economists that Business Standard talked to, four projected the consumer price index-based inflation to remain below the May figure of 7.04 per cent, while the remaining five pegged it at higher than that.

At the lower end of these projections, the average inflation rate would stand at 7.21 per cent during the first quarter of the current financial year. At the higher end, the rate would touch 7.36 per cent during this period.
 

At both ends, the average inflation rate would, however, be lower than the Reserve Bank of India Monetary Policy Committee's (MPC's) projection of 7.5 per cent for this period. This may give slight comfort to the RBI's panel, which may not deter it from taking further repo rate hikes in its monetary review next month. 

This is so because June would be the sixth month in a row when inflation would be higher than RBI's upper tolerance limit of six per cent. If it extends for another three months, RBI will have to explain to the government the reasons behind its failure to keep it within the mandated level, propose measures to contain it and give a timeline to bring it below six per cent.

According to MPC's own projections, the inflation rate may not come down below six per cent on average before the fourth quarter of the current financial year.

Though growth in the index of industrial production (IIP), as projected by economists, looks quite impressive, it is just a base effect of the previous two years that is giving it a bump. Even at the highest projection of 24 per cent growth, IIP would be just two per cent higher than in the comparable pre-Covid period of May 2019.

This may present a bit of a policy dilemma for MPC since higher interest rates may dampen growth spirits. However, MPC has made it quite clear that bringing inflation to six per cent remains its main objective.

In June, MPC had attributed the decision to raise the repo rate by 50 basis points to its objective of achieving the medium-term target for CPI inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.

As cited above, inflation may still remain quite higher than this objective in June.

Icra chief economist Aditi Nayar pegged the June inflation at 7.2 per cent on the back of higher vegetable prices amidst an uneven start to the monsoon season.

"While the recent easing in global commodity prices poses a relief, we remain watchful of the underlying momentum in services inflation in the months ahead, given the relatively stronger demand for services amidst the continuing unevenness of the economic recovery," she said.

Rahul Bajoria, MD & Chief India Economist at Barclays said imported inflation remains the key driver of higher prices, but fuel tax cuts, RBI rate action and initial signs of stabilising food prices are expected to anchor inflation in the coming months.

Sakshi Gupta, principal economist at HDFC Bank said inflation is expected to remain above seven per cent in June on the back of elevated food prices — particularly vegetables and cereals although excise duty cuts on petrol and diesel along with the reduction in edible oil prices are likely to keep further upside pressures in check.

Yuvika Singhal, economist at QuantEco Research, said overall, June will mark the third consecutive reading of CPI inflation remaining above seven per cent.

"In each of the months so far in CY22, CPI inflation has remained above RBI’s upper threshold of six per cent. While the recent sizeable correction in most global commodity prices offers some comfort on the inflation outlook, but given the latent/pipeline price pressures (from electricity tariff adjustments, GST rate hikes, revision to price of services, MSP hikes etc.) we continue to hold on to our FY'23 CPI inflation forecast of 6.5 per cent," she said.

Now, come to a bit of a contrarian opinion than the ones cited above.

Shravan Shetty, Managing Director of Primus Partners said, "The month of May saw the CPI Inflation reduce to 7.04 per cent, from an eight-year high in April and we believe the downward trend will continue."

However, he said though there has been a reduction in global commodity prices, the transmission may take a few more weeks to trickle down to the end-consumer moderating its impact on June numbers. Also, another critical factor is that the depreciation of the rupee has partially negated the price reduction in terms of the dollar, he argued.

On industrial production, Nayar said given the sharp year-on-year (YoY) expansion displayed by most high-frequency indicators as well as the core sector in May 2022, we expect the IIP growth to rise further to 19 per cent in that month, on the back of a falling base related to the second wave of Covid-19 in India in May 2021.

The output of the eight-industry core sector, which has a bit over 40 per cent weight in IIP, grew by a 13-month high of 18.1 per cent in May.

Bajoria said growth in industrial output is expected to accelerate to 20 per cent YoY in May, largely on the Omicron-induced low base.

"The sequential recovery in fertilizer, steel and petroleum products output remains robust, in line with the resiliency seen in other high-frequency growth indicators,'' he said.

Kanishk Maheshwari, co-founder, investment realisation division of Primus Partners, said while the Russia-Ukraine conflict has led to a rise in global commodity prices (international oil prices have surged to a 14-year-high) resulting in broader price pressure, there is a significant improvement in the capacity utilisations levels.

The last month's data, which marked a successful growth for the mining, manufacturing and electricity sectors suggests that the Y-o-Y growth of the IIP will only increase in the month of May, he said.

Moreover, public capital expenditure will play a significant role in safeguarding recovery by giving impetus to economic growth in the long run, Maheshwari said.