For many hapless consumers who are ravaged by the effects of the weak rupee and soaring domestic fuel prices, there was some solace on Wednesday in the form of good news on the retail inflation and industrial output front.

Retail inflation came in at a 10-month low of 3.69 per cent for August as compared to 4.17 per cent in the previous month. However, the latest Consumer Price Index (CPI)-based inflation print was higher than the 3.28 per cent level recorded in August last year.

Industrial output

Aided by some base effect and smart show by the manufacturing sector, factory output grew 6.6 per cent in July as compared to 1 per cent growth in July last year.

Last July and the subsequent months were characterised by the GST effects that depressed production processes especially in the SME segment.

For the April-July 2018 period, factory output grew 5.4 per cent higher than 1.7 per cent growth in same period last year, official data showed.

RBI policy rate hike

Many economists expect the Reserve Bank of India to go for a policy rate hike in its October policy review meeting.

Aditi Nayar, Principal Economist, ICRA, said the dip in the August CPI inflation below the Monetary Policy Committee’s medium term target of 4 per cent, juxtaposed by the looming inflation risks, the robust GDP growth print for Q1 FY19 and the continued weakening of the rupee, would complicate the next monetary policy decision.

On balance, the scales appear tipped towards a third consecutive rate hike in the October policy review, along with a change in stance to withdrawal of accommodation, unless crude oil prices and the rupee record an appreciable reversal in the intervening period, she said. Madan Sabnavis, Chief Economist, CARE Ratings, said: “Given the developments in the oil market and the currency we expect a rate hike of 25 bps in the October policy notwithstanding the sub-4 per cent inflation number”. CARE Ratings is looking at CPI inflation in 5-5.5 per cent range by end March.

Devendra Kumar Pant, Chief Economist, India Ratings, said a robust 1Q FY19 GDP growth, coupled with declining inflation trajectory and a relatively stable IIP growth, should make the RBI more optimistic about the economy and hold on policy rate in the forthcoming policy review in view of two back-to-back hikes.

However, the global developments manifesting in continued weakness of the rupee and elevated crude oil prices may prompt a rethink on the part of the RBI. Therefore, Ind-Ra, unlike its earlier stance, now believes that there may be a possibility of another rate hike this fiscal, Pant said.

However, some economists do feel that the cooling of inflation below the RBI’s comfort level raises the probability that the central bank may not go for another round of rate hike in October

Related Topics