According to estimates made by economists and experts, retail price inflation may have been in the range of 6.8 to 7.25 percent in June compared to 7.04 percent the month before. This is true despite the government taking numerous steps to reduce price pressures.
On the other hand, growth in industrial production is likely to have accelerated by at least an 11-month high of 14.5-24% in May compared to 7.1% in April. However, rather than a true increase, the climb would only be a statistical illusion.
This evening is the scheduled time for the release of the retail price inflation data for June and the industrial production data for May.
Four of the nine economists contacted by Business Standard predicted that consumer price index-based inflation would remain below the 7.04 percent recorded in May, while the remaining five predicted higher inflation.
The average inflation rate for the first quarter of the current fiscal year, at the low end of these projections, would be 7.21%. During this time, the rate would reach its highest point of 7.36 percent.
However, the average inflation rate would be lower than the 7.5% forecast for this period by the Reserve Bank of India Monetary Policy Committee (MPC) at both ends of the spectrum. This might provide the RBI panel with some small solace, but it might not prevent it from raising the repo rate further in its monetary review next month.
This is because June would mark the sixth consecutive month with inflation above the RBI’s upper tolerance limit of 6%.
RBI will be required to explain to the government the reasons behind its inability to keep it within the permitted level, suggest measures to contain it, and provide a timeline to bring it down to 6% if it persists for an additional three months.
MPC’s own forecasts indicate that the average inflation rate might not drop below 6% until the fourth quarter of the current fiscal year.
Though economists’ projections for growth in the index of industrial production (IIP) look quite impressive, the growth is merely a base effect of the previous two years. IIP would be just 2% higher than in the comparable pre-Covid period of May 2019 even at the highest projection of 24% growth.
Given that higher interest rates could depress growth expectations, this could present the MPC with a small policy conundrum. However, the MPC has made it abundantly clear that achieving 6% inflation remains its primary goal.
The MPC had stated in June that it wanted to achieve the medium-term target for CPI inflation of 4% within a range of +/- 2% while promoting growth. This was why it had decided to increase the repo rate by 50 basis points.
As previously mentioned, inflation may still be quite higher than this goal in June.
Aditi Nayar, the chief economist at ICRA, estimated June inflation at 7.2% due to higher vegetable prices and an unpredictably early monsoon.
Although the recent drop in global commodity prices is a relief, she added, “given the relatively stronger demand for services amid the ongoing unevenness of the economic recovery, we remain watchful of the underlying momentum in services inflation in the months ahead.”
According to Rahul Bajoria, MD & Chief India Economist at Barclays, imported inflation continues to be the main cause of higher prices, but in the upcoming months, it is anticipated that fuel tax reductions, RBI rate action, and early indications of a stabilization in food prices will anchor inflation.
As a result of high food prices, particularly for vegetables and cereals, Sakshi Gupta, principal economist at HDFC Bank, predicted that inflation would remain above 7% in June. However, she added that lower excise taxes on gasoline and diesel as well as lower prices for edible oils are likely to restrain any further upward pressure.
Overall, June will mark the third consecutive reading of CPI inflation remaining above 7%, according to QuantEco Research economist Yuvika Singhal.
“CPI inflation has remained above RBI’s upper limit of 6% in each of the months so far in CY22. We continue to cling to our FY’23 CPI inflation forecast of 6.5% despite the recent sizeable correction in the prices of most global commodities, she said. “Given the latent/pipeline price pressures (from electricity tariff adjustments, GST rate hikes, revisions to the price of services, MSP hikes, etc.), we also continue to hold on to our FY’22 CPI inflation forecast of 6.5%,” she added.
Come to a slightly different conclusion from the ones mentioned above now.
The CPI Inflation decreased to 7.04 percent in May from an eight-year high in April, according to Shravan Shetty, Managing Director of Primus Partners. We anticipate the downward trend to continue.
Although there has been a drop in commodity prices globally, he noted that it might take a few more weeks for the transmission to reach the final consumer, reducing its effect on June numbers. He added that the depreciation of the rupee has partially negated the price reduction in terms of the dollar, which is another crucial factor.
Regarding industrial production, Nayar stated that given the significant year-over-year (YoY) growth shown by the majority of high-frequency indicators as well as the core sector in May 2022, we anticipate that the IIP growth will increase to 19% in that month, on the back of a declining base related to the second wave of Covid-19 in India in May 2021.
The eight-industry core sector’s output increased by a 13-month high of 18.1% in May, with a weight of just over 40% in IIP.
According to Bajoria, the Omicron-induced low base is largely to blame for the anticipated acceleration of industrial output growth to 20% YoY in May.
According to him, “the sequential recovery in the output of steel, fertilizer, and petroleum products remains robust, in line with the resiliency seen in other high-frequency growth indicators.”
While the Russia-Ukraine conflict has caused a rise in global commodity prices (foreign oil prices have surged to a 14-year high), resulting in broader price pressure, there has been a noticeable improvement in capacity utilisation levels, according to Kanishk Maheshwari, co-founder, investment realisation division of Primus Partners.
The IIP’s Y-o-Y growth will only accelerate in the month of May, according to the data from the previous month, which showed successful growth for the mining, manufacturing, and electricity sectors.
Public capital spending will also be crucial in preserving the recovery by fostering long-term economic expansion, according to Maheshwari.