Inflation, IIP slide raises rate cut hopes by RBI next month

“The number of 1.54 per cent (inflation) is historically low and reflects the firm and ongoing consolidation of macroeconomic stability,” Chief Economic Adviser Arvind Subramanian told reporters after the numbers were released by the Central Statistics Office on Wednesday evening.

By: ENS Economic Bureau | New Delhi | Published:July 13, 2017 2:39 am
Inflation, rate cut, RBI, Reserve Bank of India, Arvind Subramanian, Consumer Price Index, indian express news, business news The factory output growth, measured on the Index of Industrial Production (IIP), for April-May period decelerated to 2.3 per cent from 7.3 per cent in the same period last fiscal.

Retail inflation hit a “historically low” level of 1.54 per cent in June while industrial output growth fell sharply to 1.7 per cent in May from 8 per cent a year-ago, bolstering chances in the Reserve Bank of India’s cutting interest rates in its review of the monetary policy next month.

Inflation fell due to dip in food items like vegetables, pulses and milk products, while industrial output recorded lower growth on weak performance of mining and manufacturing sector. “The number of 1.54 per cent (inflation) is historically low and reflects the firm and ongoing consolidation of macroeconomic stability,” Chief Economic Adviser Arvind Subramanian told reporters after the numbers were released by the Central Statistics Office on Wednesday evening. “The last time we saw such inflation — according to slightly different CPI (IW) — was in 1999 and before that in August 1978,” he added. The latest series of Consumer Price Index (CPI) was introduced in January 2012. Inflation in the previous month — May this year — was 2.18 per cent while in June last year it was at 5.77 per cent.

“Clearly, this low number and what it implies about underlying price pressures – as well as the latest IIP data just released – is something that, I am sure, all policy makers will reflect upon very very carefully,” Subramanian said, adding that this reflects paradigm shift in the inflation process to low levels of inflation.

The factory output growth, measured on the Index of Industrial Production (IIP), for April-May period decelerated to 2.3 per cent from 7.3 per cent in the same period last fiscal. The data further revealed that output of the capital goods segment, considered as key indicator of investment, shrunk by 3.9 per cent compared to a high growth of 13.9 per cent recorded in May 2016.

The consumer durables segment too witnessed a decline. While mining sector output declined by 0.9 per cent in May against 5.7 per cent growth in the year-ago month, the growth of manufacturing sector slowed to 1.2 per cent from 8.6 per cent in the same month last year. However, electricity generation expanded by 8.7 per cent in May as against 6.1 per cent growth in the corresponding period last year.

ICRA expects June IIP growth to remain subdued as well. “The pace of contraction of the output of Coal India Limited (CIL) worsened to 7.2 per cent in June 2017 from 4.4 per cent in May 2017, which would weigh upon the performance of the mining sector in the just concluded month,” said Aditi Nayar, principal economist at rating agency ICRA Ltd.

“The early indicators offer a sobering trend for June 2017, such as the deepening contraction in output of CIL, the sharp deterioration in electricity generation and dip in growth of automobile production. Moreover, the continued trimming of inventories prior to the onset of the GST may result in a substantial decline in the IIP growth in June 2017 relative to the healthy 8.9 per cent recorded in June 2016,” she said.

On the inflation front, the data showed food basket inflation contracting to 2.12 per cent last month as compared to (-)1.05 per cent in May. Vegetables inflation declined to 16.53 and that of pulses and products to 21.92 per cent. The retail inflation in the fuel and light segment slowed to 4.54 per cent as compared to 5.46 in May.

The RBI, which mainly takes into account retail inflation, is slated to meet in early August to announce the next bi-monthly policy rate. In its last policy in June, the central bank had kept the key lending rate unchanged citing risk to inflation.

Video of the day

For all the latest Business News, download Indian Express App

    Live Cricket Scores & Results