Retail inflation jumped to four-month high of 4.87 per cent in May on costlier food items such as fruits, vegetables and cereals coupled with high fuel prices, while industrial production expanded by 4.9 per cent in April on improved performance by manufacturing and mining sectors and a robust offtake of capital goods.
Soumya Kanti Ghosh, Group Chief Economic Adviser at SBI, said, “The CPI and IIP numbers portray a contrasting story of base effects. The jump in CPI was anticipated, specifically the core CPI (still likely to peak in June and may even top 6.5 per cent on the back of a lowest core CPI in June 2017). IIP jumped too, but because of a favourable base.”
“The worrying thing is that 2017-18 was a relatively bad year for corporates with topline / net sales for 3964 corporates reporting an increase by 11 per cent, but bottomline / PAT (adj) exhibiting decline by about 15 per cent. We foresee an investment recovery in the second half of 2018-19, once consumption growth gains momentum,” Ghosh said.
The overall industrial growth was driven by manufacturing and mining and capital, infrastructure and non-durable goods. Despite base being low and select auto segments doing well, consumer durables sector growth languished.
Devendra Kumar Pant, Chief Economist and Senior Director (Public Finance) at India Ratings and Research Pvt Ltd, said, “Inflation of transport and communication (fuel for vehicles) increased to 5.3 per cent in May 2018 (against 4.5 per cent in April 2018) and fuel and light (fuel excluding conveyance) increased to 5.8 per cent in May 2018 (against 5.2 per cent in April). Higher retail inflation in May 2018 also originated from food inflation, it increased to three-month high of 3.10 per cent mainly due to fruits, vegetables, cereals and oil & fats.”
Auguring tough times in the near term but some relief later during the year, Pant noted, “Although 10 days farmers strike in various parts of the country will impact the inflation numbers for the month of June. The strong base effect, some moderation in crude oil prices and some stability in currency is likely to provide relief in the coming months.”
“It is likely that the June inflation number may breach RBI’s first half financial year 2018-19 inflation forecast of 4.8 per cent to 4.9 per cent,” Pant flagged.
This is seconded by Aditi Nayar, Principal Economist at ICRA. Nayar said, “Headline inflation remains on track to cross 5.0 per cent in the next reading, peaking at around 5.3 per cent in June 2018, followed by a base effect led softening in the subsequent months.”
Nevertheless, the dispersion of the monsoon, the revision of MSPs, movement in crude oil prices and the rupee as well as evolving fiscal risks, would crucially influence the inflation trajectory, Nayar added.