Source: The Economic Times, Dec 13, 2017
Consumer inflation spiked to a 15-month high in November while industrial growth dropped to a 3-month low in October, twin blows for an economy that has shown signs of recovery.
The higher-than-expected retail inflation effectively rules out any rate cuts in the near future by the Reserve Bank of India even as industrial growth remains muted. To be sure, both indicators are likely to improve in the coming months, economists said.
Consumer inflation rose to 4.88% in November from 3.58% in October and 3.63% in the year earlier, according to the Central Statistics Office. The simultaneously released Index of Industrial Production (IIP) grew 2.2% in October, down from an upwardly revised 4.1% in September and 4.2% in the year earlier.
“Firm inflation and concerns over generalised pressures have shut the door on rate cuts,” said Radhika Rao, India Economist, DBS Bank. “Further increases in inflation and a narrower output gap might prod them (RBI) to shift to a tightening bias next year.” Mainly driven by the sharp rise in vegetables prices, consumer inflation was well above the 4.2% estimated by independent experts and exceeded the RBI’s forecast of 4.2-4.6% for the second half of the year.
The BSE Sensex fell 0.68% on Tuesday to 33,228 points on higher crude prices and the anticipation of a spike in inflation. Markets closed ahead of the data release. Tenyear bond yields rose further to 7.2%, suggesting anticipation of higher interest rates. Brent crude prices rose close to a two-and-ahalf-year high on Tuesday.
The next meeting of the monetary policy committee is on February 6 and 7. Rates were kept unchanged after the last meeting on December 5 and 6. Under the new monetary policy framework, the central bank is mandated to maintain consumer inflation at 4% with a band of two percentage points on either side.
If inflation rises further in the next few months, the RBI may even be forced to raise rates, but experts said they expect inflation will cool as vegetables prices drop, a trend that’s already started.
“Some of the factors driving the uptick in the retail inflation in November 2017 would prove to be transient, especially the spike in vegetable prices,” said Aditi Nayar, principal economist, ICRA. She expects an extended pause on policy rates by the RBI.
Food inflation rose to 4.4% in November as prices of vegetables rose due to cyclone Ockhi, which disrupted supplies. Retail inflation in vegetables was 22.5% in November, 6.2% in fruits and 8% in eggs.
The Seventh Central Pay Commission’s impact showed up in high housing inflation of 7.4% while higher crude prices resulted in fuel and light inflation touching 7.9% in November.
Core inflation, a measure of demand pressure keenly watched by policymakers, touched an eightmonth high of 4.9% in November from 4.6% in October.
Further softening is likely in inflation going ahead owing to goods and services (GST) rates being cut on 178 products in November to lower prices and bring relief to consumers and companies. “There could be some countervailing force towards reduction of prices due to the cut in GST rates on some nonfood products in the coming months,” said Madan Sabnavis, chief economist, CARE Ratings.
The second successive month of decline in industrial production from a high of 4.5% in September was due to the subdued performance of all sectors. Manufacturing grew 2.5%, mining 0.2% and electricity generation 3.2% in October. Cumulative industrial growth in the April-October period was 2.5% compared with 5.5% in same period last year.
Twelve out of 23 manufacturing subgroups posted negative growth in October.The silver lining in the numbers is the third successive month of positive growth in production of capital goods (6.8% in October) suggesting some pickup in investments.
Consumer non-durables, a proxy for the rural economy, posted a strong 7.7% rise in October but the urbanoriented consumer durables sector contracted 6.9% in the month.
Growth of infrastructure/construction goods improved to a 10-month high of 5.2% in October. “The expected uptick in production on account of either restocking or meeting enhanced demand has not happened except in pockets like pharma and auto sectors,” said Sabnavis.
The strong 14.3% rise in the sales of passenger vehicles suggests a rebound is ahead, helped by the low-base effect on account of last year’s note swap.”The favourable base effect related to the temporary slowdown in activity after demonetisation, is likely to boost volume growth in a variety of sectors in the remainder of FY2018,” Nayar said.Second-quarter GDP growth recovered to 6.3% from a three-year low of 5.7% in the April-June period, reversing a five-quarter slide, the government said last month.