June Sees Retail Inflation Surge to 4.81%, While May Records Three-Month High of 5.2% in IIP

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The government has given the Reserve Bank of India (RBI) the responsibility of keeping retail inflation within a range of 4% with a margin of 2% on either side.

In June, retail inflation saw a slight increase after four consecutive months of decline, primarily due to a significant rise in vegetable prices. However, there was some relief as industrial output reached a three-month high of 5.2% in May, providing some reassurance amid concerns of slower economic growth.

According to official data released on Wednesday, the consumer price index (CPI) showed a year-on-year inflation rate of 4.81% in June, up from 4.31% in May. In June 2022, retail inflation was higher at 7.01%.

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Within the food and beverages basket, retail inflation experienced a significant rise to 4.63% in June, driven not only by higher inflation in vegetables but also in cereals (12.71%), eggs (7.03%), milk (8.56%), pulses (10.53%), and spices (19.19%).

Economists predict that retail inflation will further increase in July due to surging tomato prices. Madan Sabnavis, Chief Economist at Bank of Baroda, stated, “The food basket is beginning to bite.

Aditi Nayar, Chief Economist at ICRA, expects the spike in vegetable prices to push CPI inflation to an uncomfortable 5.3-5.5% in July 2023, exceeding the Monetary Policy Committee’s last forecast of 5.2%.

While retail inflation in miscellaneous items rose to 5.19% in June, other subgroups such as clothing and footwear (6.19%), housing (4.56%), and fuel and light (3.92%) saw a decline.

In terms of industrial production, the index of industrial production (IIP) expanded by 5.2% in May compared to 4.5% in April. All three sectors recorded positive growth, although it is essential to consider the base effect following the Covid-19 pandemic, as IIP had expanded at a much sharper pace of 19.7% in May 2022.

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In May 2023, the mining sector grew by 6.4%, manufacturing expanded by 5.7%, and electricity generation showed modest growth at 0.9%. Construction goods grew the most rapidly at 14%, followed by capital goods at 8.2%. Consumer non-durables grew by 7.6% while primary goods grew by 3.5%.

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The overall scenario is mixed, with infrastructure-oriented sectors performing better. However, there is a need for an increase in consumer spending, according to Madan Sabnavis.

India Ratings & Research expects IIP to grow at a modest pace in the near term, considering high-frequency indicators such as coal production, power demand, steel production, sustained government capital expenditure, and expected inflation stabilization around 5%. The agency predicts that IIP will remain range-bound at 5% year-on-year in June 2023.

While the RBI is expected to maintain a pause on further rate hikes in the next policy review, rising prices will be an additional factor to monitor. Madhavi Arora, Lead Economist at Emkay Global Financial Services, mentioned that the RBI faces pressure to stay vigilant on domestic dynamics due to global external factors and the transient food price spike, which could complicate their reaction function in the future.

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