CPI inflation slows to lowest since 2012

Retail inflation in May, at 2.18%, eased to its lowest level since the Centre began measuring it on a nationwide basis in 2012, driven in large part by cooling food prices, according to a latest government release. Separate data showed industrial output expanded by 3.1% in April.

Inflation measured by the Consumer Price Index (CPI) was even slower than the 2.99% seen in April, the previous record low. Within the index, food and beverages category witnessed a contraction of 0.2% in May, compared with a growth of 1.3% in April.

Pharma sector

Growth in the Index of Industrial Production (IIP) was spurred by the manufacturing sector within which the tobacco and the pharmaceuticals sectors grew the fastest.

“Even though the Reserve Bank of India has revised its estimates of inflation downwards for the first half of the year, these numbers are clearly going further down,” said D.K. Srivastava, chief policy advisor, EY India.

“It reflects the crisis the farmers are facing because food prices have crashed as a result of bumper crops. This does provide stronger grounds for the RBI to revise its interest rates downwards in its next review,” he said.

Inflation in the fuel and light segment in May stood at 5.5%, compared with 6.1% in April.

Inflation in the clothing and footwear segment eased marginally to 4.4% from 4.6% over the same period. The housing segment saw inflation remaining at the same rate of 4.8%.

“Food prices could turn around in June due to the farmer agitation in parts of the country,” said Care Ratings.

“There is an upside risk to inflation on account of three major factors: the increase in the house rent component in CPI, the implementation of GST, and the announcement of large farm loan waivers and higher deficits of states.

“The RBI is expected to maintain status quo until September 2017 as the inflation for next couple of months is dependent upon turnaround of monsoon, increase in the house rent allowances, implementation of GST and farm loan waivers,” Care Ratings added. “We expect only a 25 basis points (bps) cut in October 2017.”

“Going forward, CPI is expected to be sub-2% for the next two months before moving up but will stay below 4% till November,” State Bank of India said in a report. “For FY’18, CPI inflation average could thus be 3.5% with a significant downward bias.”

Industrial production

The manufacturing sector grew 2.6% in April compared with 2.7% in March, while growth in the mining sector slowed drastically to 4.2%. Electricity output grew 5.4% in April, slower than March’s 6.2%.

The consumer durables segment saw a drastic contraction of 6% in April, from a growth of 13.8% in the same month of the previous year. The capital goods segment also witnessed a contraction of 1.3%, compared with a growth of 8.1% in April 2016.

“The performance has been mixed in April with negative growth rates in capital goods and consumer durables which are the focal points for future growth,” Care Ratings added.

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