Factory growth slips to 7-mth low; retail inflation at 5%

Industrial production slipped to a seven-month low of 3.2 per cent in May due to sluggish performance of manufacturing and power sectors, while retail inflation continued to remain firm in June on costlier fuel, according to two sets of official data released on Thursday.

The Monetary Policy Committee (MPC), headed by RBI governor Urjit Patel, which would meet later this month to decide on the next bi-monthly interest rate review, would factor these key macro-economic data.

The data was released after the close of stock markets, which witnessed the benchmark BSE Sensex ending at a lifetime high of 36,548.41. The rupee too surged by 20 paise to end at a one-week high of 68.57 against the US dollar buoyed by a steep fall in crude prices and a strong rally in equity markets.

Sunil Kumar Sinha of India Ratings and Research (Fitch Group) said factory output growth has been declining in each successive month since November 2017 with the exception of April 2018. “The more disappointing part of the unfolding factory output story is weakness in manufacturing sector,” he said.
The manufacturing sector, which constitutes 77.63 per cent of the index, grew by just 2.8 per cent in May, marginally up from 2.6 per cent in the corresponding period last year.

Amid sluggish factory output numbers, the Consumer Price Index-based inflation spiked to a five-month high of 5 per cent in June on costlier fuel, despite easing food prices and reducing possibilities of an interest rate cut by the Reserve Bank in its upcoming monetary policy review.

“June inflation number is the likely peak we have seen in this financial year. Subsequent prints are expected to average below 4.5 per cent,” said Yes Bank chief economist Shubhada Rao.

The core inflation remains elevated that may keep RBI on guard, she observed.

Aditi Nayar, economist with ratings firm Icra, expects the MPC to increase the repo rate by another 25-50 percentage points in 2018-19, depending on the extent to which various inflationary and fiscal risks materialise.

RBI had raised its key short-term benchmark lending rate (repo) by 0.25 per cent to 6.25 per cent after its last MPC meet in June. The rate was raised after almost four-years on inflationary concerns. The MPC will meet for three-days from July 30 and announce its decision on the third bi-monthly policy of the current financial year on August 1. The government has mandated the Reserve Bank to keep inflation at 4 per cent (+/- 2 per cent).