Retail inflation slumped to record low of 2.18% in May driven by sharp drop in kitchen staples like vegetables and pulses, strengthening government's case for lowering of interest rate by RBI.
For the first time since January 2012, food prices saw deflation in May (-1.05%) and the prospect of good monsoon rains is likely to keep food inflation in check. Inflation apart, industrial output too slipped to 3.1% in April from 6.5% a year ago, possibly because of lagged impact of demonetization, government data showed today.
The worst performing sectors in April were manufacturing, capital goods and consumer durables. The Consumer Price Index (CPI) based inflation strengthened the finance ministry's stand that Reserve Bank of India's forecast on price rise had large errors and there was a case for cutting interest rate to help private investments to pick and boost economic growth.
Retail inflation was the lowest since the government started publishing a wider CPI data in 2012. Consumer prices rose 2.99% on year in April and 3.81% in March. Clothing, housing, fuel and light also saw lower inflation rate in May while prices of vegetables declined by 13.44% and that of pulses and products by 19.45%.
Earlier this month, RBI left key interest rate unchanged as it wanted to be more sure that inflation will stay subdued. This left finance ministry fuming as it felt that inflation was consistently low warranting a rate cut. CPI inflation in May is at the lower end of the RBI's projected headline inflation band of 2-3.5% in the first half the current fiscal.
Sunil Kumar Sinha, Principal Economist, India Ratings & Research, said though inflation is going to remain low and well within the comfort zone of RBI, probability of large policy rate cut is low. "At best, we can have 25 basis point rate cut in the remaining FY18. However, its timing will be data dependent," he said.
On CPI inflation numbers, he said while pulses deflation is more structural in nature, the vegetable deflation could be cyclical and can change its course in near future due to monsoon related aspects. "While decline is food inflation is good news for policy makers and consumers, it is not very good news for farmers and especially vegetable and pulses farmers.
"Prices of pulses in some harvesting areas are already lower than the MSP and thus farmers are not getting full benefit of increased production leading to farmer unrest and increasing clamour for farm loan waiver," he said. As for the Index of industrial production (IIP), growth in April was lower than 6.5% in the same month last year. The reason was poor showing by manufacturing, mining and power sectors coupled with contraction in capital goods (-1.3%) and consumer durables (-6%).
The Central Statistics Office (CSO) revised upwards the IIP growth figure for March to 3.75% from provisional estimate of 2.7% released last month. According to the CSO data, manufacturing sector, which constitutes 77.63% to the IIP, grew at 2.6% in April compared to 5.5% in same month last year.
Similarly, mining sector output grew at 4.2% during the month under review compared to 6.7 year ago. Power generation rose by 5.4% in April, down from 14.4% expansion in April last year. Sinha said 3.1% IIP growth could be due to the lagged effect of demonetization which may play out even in the first quarter of FY18. Under final revision of January data, IIP growth has been revised to 3.01% from 3.8% estimated earlier.
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