At 6.95%, inflation up to 17-month high; slight uptick in sluggish industry output

Industrial output grew by 1.7 per cent February, despite a 3.2 per cent contraction in the same period a year ago, a separate set of data released by the NSO showed. Manufacturing output, which accounts for 77.6 per cent of the weight of the IIP, grew 0.8 per cent in February as against 3.4 per cent contraction a year ago, while mining and electricity grew 4.5 per cent each. IIP had grown 1.5 per cent in January.

With the continued surge in headline inflation, economists said there are lingering concerns that the inflation rate for the health and household goods sectors is turning structural.

The rising inflation print also foreshadows a rate-tightening process by the RBI, with the rate hike cycle predicted to begin as early as June 2022.

The sluggish IIP print is a double whammy of sorts, and going forward, weak consumption demand remains a risk to economic recovery along with the continued weakness in capital goods, with private investment expected to face headwinds in the wake of the continuing Russia-Ukraine conflict.

With the March retail inflation coming in at 6.95 per cent, the quarterly inflation rate (for the January-March quarter) has breached the 6 per cent mark of the RBI after a gap of four quarters.

Core inflation — the non-food, non-fuel component of inflation — also rose to a 10-month high of 6.29 per cent in March. The combined food price inflation rose to 7.68 per cent in March from 5.85 per cent a month ago and 4.87 per cent a year ago.

Fuel and light inflation remained high at 7.52 per cent in March, but eased from 8.73 per cent a month ago. Among food items, oils and fats recorded inflation of 18.79 per cent, while vegetables inflation rose 11.64 per cent, and meat and fish inflation grew 9.63 per cent. In the non-food category, clothing and footwear inflation was at 9.40 per cent in March.

“We have been pointing out that the health and household goods/services inflation is turning structural because in the last 15 months, health inflation has been in excess of 6 per cent and household goods services inflation in excess of 5 per cent in the last 10 months. Going forward, with an increase in cost of essential medicines from April 2022, health inflation is likely to exert further pressure on retail inflation,” said Sunil Kumar Sinha, Principal Economist, India Ratings and Research.

According to Rahul Bajoria, Chief India Economist, Barclays, given that CPI inflation has exceeded the RBI’s target range, “we now expect four 25 bp rate hikes from the RBI in FY22-23, starting from June’s MPC (review) meeting.”

Echoing this, Aditi Nayar, Chief Economist, ICRA, said: “The rate hike cycle may begin as early as June 2022 if the next CPI inflation print doesn’t significantly cool off from the March 2022 level. We now expect to see 50-75 bps of rate hikes by the end of Q2 FY2023, followed by a pause in H2 FY2023, and perhaps another 50 bps of hikes in FY2024.”

The RBI in its latest monetary policy last week while maintaining status quo for its key repo rate and retaining the accommodative stance, had indicated it will engage in a gradual and calibrated withdrawal of surplus liquidity to rein in inflation.

The RBI had also said that the elevated global price pressures in key food items such as edible oils, and in animal and poultry feed due to global supply shortages impart high uncertainty to the food price outlook, warranting continuous monitoring.

Among the use-based components of industrial output, primary goods, capital goods, intermediate goods and infrastructure goods recorded growth in February, while both consumer durables and non-durables recorded a contraction of 8.2 per cent and 5.5 per cent, respectively.

Infrastructure/construction goods grew by 9.4 per cent in February as against 3.5 per cent contraction a year ago, while capital goods grew 1.1 per cent as against 4.2 per cent contraction in the year-ago period.

Capital goods output — an indicator for investment — had remained in negative territory for four consecutive months till January. For consumer durables output — indicator of consumption demand — this is the fifth straight month of contraction.

The industrial output numbers, after remaining higher than pre-Covid level of February 2020 in January, again slipped below the pre-Covid level in February 2022 due to the likely impact of the third wave of Covid, India Ratings said. “Except electricity output levels, the other two broad-based segments namely mining and manufacturing in February 2022 were lower than the pre-Covid level. Similarly, except the infrastructure goods, the output level of all other use-based segments in February 2022 was lower than the pre-Covid level,” Sinha said.