THE RETAIL inflation rate rose to a six-month high of 5.59 per cent in December, primarily due to increase in food prices, according to data released by the National Statistical Office (NSO).
Another set of data released by NSO Wednesday showed that industrial output grew by 1.4 per cent in November despite a low base of (-)1.6 per cent in the previous year, as manufacturing and mining outputs were subdued amid weak investment and consumption demand.
The low base effect and higher food inflation pushed up the headline retail inflation, with core inflation — non-food, non-fuel — hovering near 6 per cent and the impending full pass-through effect of the telecom price hike yet to filter in.
Also, with retail inflation inching closer to the upper tolerance level of the 4+/-2 per cent target of the RBI, economists expect only a negligible chance of a hike in rate, especially reverse repo, in the upcoming monetary policy review meeting in February.
“While the CPI inflation has hardened sharply between November and December 2021, the uncertainty triggered by the third wave is sure to take precedence when the MPC meets next month. We now see a negligible likelihood of a change in stance or reverse repo hike in the February 2022 policy review,” Aditi Nayar, Chief Economist, ICRA, said.
“The duration of the current wave and the severity of restrictions will determine whether policy normalisation can commence in April 2022, or be delayed further to June 2022. With a higher inflation target, the MPC can choose to prioritise growth revival for much longer than other major Central Banks for many of whom inflation control has become a pressing policy focus,” Nayar said.
Food inflation climbed to a six-month high of 4.05 per cent in December. The rise was mainly due to milk (3.8 per cent) and cereals inflation (2.6 per cent), which rose to a 12-month and a 14-month high, respectively.
Core inflation came in at 6.01 per cent in December, remaining above 6 per cent for three consecutive months. Clothing and footwear inflation now stands at an 89-month high of 8.30 per cent on the back of higher cotton prices.
“Passing on the input cost into output costs by various FMCG and telecom companies and rising health/ hospital costs are expected to keep core inflation high going forward,” Sunil Kumar Sinha, Principal Economist, India Ratings, said.
Weak consumption and investment weighed on the Index of Industrial Production.
The manufacturing sector’s output, which accounts for over three-fourth of the total weight of the index, grew 0.9 per cent in November as against a contraction of 1.6 per cent in the previous year. The mining output grew 5 per cent as against a contraction of 5.4 per cent, while electricity generation grew 2.1 per cent compared with 3.5 per cent growth a year ago. Mining and manufacturing outputs were below pre-Covid levels.s
Capital goods, which is an indicator of investment, contracted 3.7 per cent in November despite a contraction of 7.5 per cent a year ago while consumer durables output contracted 5.6 per cent and consumer non-durables output grew just 0.8 per cent.
“Industrial growth is once again feeble at 1.4 per cent, which comes on a negative base of -1.6 per cent. Quite clearly, the momentum has been dissipated over time. Consumer goods have seen a pushback, which means that the pent-up demand witnessed earlier has not been sustained in November. Capital goods, including vehicles, have witnessed a setback again with a negative growth rate,” Madan Sabnavis, Chief Economist, Bank of Baroda, said.
Going ahead, the industrial output growth is seen as weak, given the risks from localised restrictions in view of new Covid variants.
“The lockdown-like conditions which are in force from mid-December, which will continue till March, will keep production levels depressed and growth in the coming quarter would be in the region of not more than 3-5 per cent even on a low base,” Sabnavis said.
Risks for both inflation and industrial output remain elevated on account of the supply-side constraints and restrictions due to the Omicron wave.