Retail inflation marginally eases to 7.01% in June; IIP grows 19.6% in May

CPI inflation stays well above the Reserve Bank of India's tolerance limit for sixth consecutive month

India's retail inflation marginally eased in June to 7.01%, but stayed well above the Reserve Bank of India's tolerance limit for sixth consecutive month as lower fuel and cooking oil prices offset higher services and food costs, showed government data on Tuesday.

Despite a substantial recent increase in food prices, rising at the fastest pace in nearly two years, overall inflation was partly contained after the government cut taxes on petrol and diesel and imposed restrictions on food exports. The consumer price index (CPI) based inflation stood at 6.26% in June 2021 and 7.04% in May 2022.

Inflation in the food basket in June 2022 was 7.75%, compared to 7.97% in the preceding month.

On the other hand, industrial production growth zoomed to 19.6% in May, as per the National Statistical Office (NSO) data.

The Index of Industrial Production (IIP) had grown 7.1% in April this year after remaining subdued for the preceding seven months.

Though growth in the index of industrial production (IIP) looks quite impressive, it is just a base effect of the previous two years that is giving it a bump. IIP growth was recorded at 27.6% in May last year, mainly due to the low-base effect.

Industrial production had grown by 13% in August last year. Thereafter, the IIP growth remained below 4.4% (in September) and touched the lowest level of 1% in November as well as December last year.

In May 2022, the manufacturing sector's output grew 20.6%, the mining output climbed 10.9%, and power generation increased 23.5%. The IIP had grown by 27.6% in May 2021.

Industrial production has been hit due to the coronavirus pandemic since March 2020, when it had contracted 18.7%.

It shrank 57.3% in April 2020 due to a decline in economic activities in the wake of the lockdown imposed to curb the spread of coronavirus infections.

"With today's print, Q1FY23E CPI inflation is undershooting RBI's projected inflation of 7.5% by 22 bps. We see incremental upside risks to CPI inflation easing off, with FY23E CPI at 6.5% with risks balanced vs earlier expectations of upside risks of 20-30 bps.

"We see the Monetary Policy Committee (MPC) take comfort from these data points and expect another 75 bps hike in the policy repo rate in FY23E with a 25-35 bps rise during the August 2022E meet," said Garima Kapoor, economist, institutional equities, Elara Capital.

RBI has raised interest rates by 90 basis points so far this year to 4.9% and is set to add more in coming months. RBI Governor Shaktikanta Das said recently inflation was unlikely to fall within the top end of its mandated target band until December.

The Quick Estimates of IIP are released on the 12th of every month (or previous working day if 12th is a holiday) with a six-week lag. They are compiled from data received from source agencies, which in turn receive the inputs from the producing factories/ establishments.