Economy

Published: July 13, 2023
Updated: July 13, 2023

Rising CPI-Based Inflation and IIP Growth Slows in India

The latest data released by the Ministry of Statistics and Programme Implementation (MoSPI) reveals an increase in retail inflation and a slowdown in industrial production growth in India. Retail inflation, measured by the consumer price index (CPI), rose to 4.81% in June, primarily driven by higher food prices. Meanwhile, the Index of Industrial Production (IIP) growth rate for May stood at 5.2%, indicating a moderation compared to the previous year.

Rise in Retail Inflation:

In June, India's retail inflation increased to 4.81% from 4.31% in May. Notably, food inflation saw a significant rise, reaching 4.49% compared to 2.96% in the previous month. Despite the increase, the current inflation rate is lower than the 7.01% recorded in June 2022.

Factors Driving Inflation:

The surge in inflation was primarily influenced by higher prices in the food and beverages category, where the CPI rose to 183 in June. On the other hand, the index remained stable in the pan, tobacco, and intoxicants category. Aditi Nayar, Chief Economist at Icra Ltd, attributed the higher inflation to a less supportive base and a spike in vegetable prices.

Implications for Monetary Policy:

Nayar predicts that the spike in vegetable prices will push the CPI-based inflation to around 5.3-5.5% in July 2023. As a result, she expects the Reserve Bank of India's Monetary Policy Committee (MPC) to maintain a hawkish tone in August, keeping the repo rate unchanged and signalling that rate cuts are unlikely in the near term.

IIP Growth Rate Slows:

The IIP growth rate for May stood at 5.2%, compared to 19.7% in the same period last year. While the growth rate increased from the previous month, the overall trend reflects a moderation in industrial production. The use-based industries, except consumer non- durables and infra/construction goods, contributed to the growth.

High-Frequency Indicators:

Several high-frequency indicators related to freight and traffic movement showed a deterioration in June compared to May. These indicators include the generation of GST e- way bills, cargo traffic at major ports, rail freight traffic, petrol and diesel sales, production of passenger vehicles and two-wheelers, and vehicle registrations. However, electricity generation, output of Coal India Limited, and finished steel consumption saw improved year- on-year growth in June.

The rise in retail inflation, driven by food prices, poses challenges for the Indian economy. The increase in CPI-based inflation and the slowdown in IIP growth rate indicate the need for careful economic management. With the vegetable price shock likely to impact inflation further, policymakers may adopt a cautious approach and monitor the situation closely. The performance of high-frequency indicators will be crucial in determining the trajectory of industrial production and overall economic recovery in the coming months.