Opinion Express View on latest NSO data: A balancing act

Data released by the National Statistical Office on Wednesday showed that retail inflation edged up to 4.8 per cent in June, after falling to a 20-month low of 4.3 per cent in May. Over the course of the entire first quarter (April-June), inflation has averaged 4.6 per cent, in line with the Reserve Bank of India’s forecast in the last monetary policy committee meeting. Alongside, data also shows that industrial production maintained its momentum. The index of industrial production rose by 5.2 per cent in May, up from 4.5 per cent the month before. While this would suggest that the macroeconomic environment is keeping a fine balance, there are risks of it turning unfavourable in the months ahead on account of the rains.

The pickup in inflation can be largely traced to two factors: A fading base effect and higher food inflation. The consumer food price index rose to 4.5 per cent in June, up from 2.9 per cent in May. Inflation was elevated in cereals, eggs and milk, pulses and spices. Food inflation will remain a source of concern in the coming months — there is the possibility of supply side issues owing to weather disruptions. This will pose upside risks to inflation. The spike in vegetable prices will likely push the consumer price index even higher in July. However, on the non-food side, even though inflation remains elevated in certain segments, core inflation, which excludes the volatile food and fuel components, has edged closer to 5 per cent as per analysts. On industrial production, the segment-wise data shows that manufacturing has grown by 5.5 per cent in the first quarter so far (April-May). The capital goods and infrastructure/construction goods segments have also continued to show healthy growth, growing by 8.2 per cent and 14 per cent respectively in May. In fact, even the consumer durables segment has registered a marginal rise after contracting for five consecutive months.

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In its last meeting, the monetary policy committee had voted to maintain the status quo on rates. A sharp rise in food prices now, if it is transitory in nature, might not influence its decision in the immediate future. However, if prices remain elevated for longer, it could restrict the committee’s degree of freedom to operate. The MPC is likely to opt for maintaining the status quo on rates when it meets next in August. How the growth-inflation dynamic evolves over the coming months will determine when the committee will pivot.