CPI inflation hits 6-month peak, IIP growth at 9-month low

Retail inflation quickened to a six-month high of 5.59% in December from a year before and industrial production growth nosedived to a nine-month low of 1.4% in November, presenting a double whammy for policy-makers as they brace for the next year’s Budget.

Dearer food products, which dominate the Consumer Price Index, offset a slight moderation in fuel inflation caused by a recent tax cut, and core inflation held steady at 5.85%. Food inflation – driven by elevated prices of the mostly-imported edible oils, sugar and certain protein-based items — jumped to 4.05% in December from 1.87% in the previous month.

Still, given that inflation remained within the Reserve Bank of India’s target band (2-6%) for the sixth straight month, the monetary policy committee (MPC) will likely continue with its growth push in its next meeting in February and wait a bit longer for further confirmation of the underlying price pressure in the economy.

Wednesday’s data release, however, prompted some analysts to predict a 25 basis point hike in the benchmark lending rate in the MPC’s meeting in April, given the external headwinds. The global commodity prices, especially that of oil, remain elevated and the US Federal Reserve may quicken the pace of tapering its asset purchases, raising the risks of capital flights from emerging economies.

The index of industrial production (IIP) shrank a tad in November from the pre-Covid (same month in FY20) level, reversing a rise witnessed in the previous three months.

Importantly, on a year-on-year basis, capital goods output shrank at the fastest pace (3.7%) in nine months in November and consumer durables witnessed the worst contraction (5.6%) in 15 months despite a favourable base. This suggests that a durable recovery in investment as well as consumption remains far from sight. On top of it, heavy downpours in Southern India slowed down the growth of infrastructure goods output to just 3.8% in November from 6.6% in the previous month.

Icra chief economist Aditi Nayar said although the performance of several high-frequency gauges, such as GST e-way bills, rail freight traffic, electricity generation and non-oil exports, picked up in December, an unfavourable base may limit the IIP growth to sub-1% in that month.

Growth in mining, manufacturing and electricity remained lower than the previous month at 5%, 0.9% and 2.1%, respectively.

Commenting on inflation, Nayar said, despite the hardening of price pressure, the uncertainty triggered by the third wave is sure to take precedence when the MPC meets next month. “The duration of the current wave and the severity of restrictions will determine whether policy normalisation can commence in April 2022, or be delayed further to June 2022,” she added.

In its statement last month, the MPC had acknowledged that “cost-push pressures from high industrial raw material prices, transportation costs, and global logistics and supply chain bottlenecks continue to impinge on core inflation”. Of course, the slack in the economy is muting the pass-through of rising input costs to output prices. It forecast CPI inflation at 5.3% for 2021-22; 5.1% in the third quarter and 5.7% in the last quarter, with risks broadly balanced.

Meanwhile, fuel and light inflation moderated for a second straight month to 10.95% in December from 13.35% in November and 14.35% in October, in the wake of the tax cut by the Centre and most states.

Sunil Kumar Sinha and Paras Jasrai said the economy is still in the midst of “anaemic investment and consumer demand”. Both capital and consumer durables have now recorded a deceleration for two successive months. With the rise in Covid cases and subsequent curbs imposed by the state governments will not only accentuate the uncertainty but also adversely impact the normalisation of economic activities, they said.