Mixed signals on health of economy

Two key data released on Wednesday showed mixed trends on the health of the economy - while retail inflation brought comfort, industrial output induced worry.

By Our Special Correspondent
  • Published 13.09.18
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New Delhi: Two key data released on Wednesday showed mixed trends on the health of the economy - while retail inflation brought comfort, industrial output induced worry.

Retail inflation fell to 3.69 per cent in August from 4.17 per cent in July, well below the RBI's inflation target of 4 per cent that augured well for companies weighed down by costly loans.

However, the index of industrial production softened to 6.6 per cent in July compared with 6.9 per cent in June. Retail inflation has been below 4 per cent in 14 of the 44 months since January 2015. Inflation was at its lowest of 1.46 per cent in June 2017.

Usually, the central bank raises overnight lending rates to banks when faced by rising inflation. On a day the rupee touched an all-time low of 72.91 to the dollar, the lower inflation brought some relief not only in corporate and government circles but also in the stock markets.

"Led by a drop in food inflation, the moderation in the core inflation to 5.9 per cent in August 2018 was broad-based," said Aditi Nayar, principal economist at Icra.

Food inflation slowed to 0.29 per cent from a year earlier, against 1.37 per cent in July on the back of good rains.

The RBI, which meets in early October, has raised benchmark rate by 50 basis points over its past two meetings to 6.5 per cent, while warning about inflation pressures. Analysts said the RBI may not raise rates, given the lower inflation figures.

Industry trend

Growth in industrial output fell to 6.6 per cent in July against 6.9 per cent in the previous month. The manufacturing segment - constituting the bulk of the index at 77.6 per cent - grew 7 per cent up from 6.9 per cent in June.

The data came about a fortnight after GDP numbers showed manufacturing to grow to a nine-quarter high of 13.5 per cent in April-June, largely due to a low base effect.

Electricity generation grew by 6.7 per cent in July against 8.5 per cent in June and mining, 3.7 per cent against 6.6 per cent in the previous month.

However, others felt that given rising crude oil prices and the spectre of the US Federal Reserve raising its interest rates, the RBI may play safe and raise interest rates by a quarter percent. Record high automobile fuel prices have led to protests through the country earlier this week.

"On balance, the scales appear tipped toward a third consecutive rate hike in the October 2018 policy review, along with a change in stance to withdrawal of accommodation, unless crude oil prices and the INR record an appreciable reversal in the intervening period," said Nayar.

The International Monetary Fund, in its report on India released last month, had cautioned that the country's average inflation was likely to rise to 5.2% in the 2018-19 from a 17-year low of 3.6% in the previous fiscal year.

The Government's Central Statistical Office data showed that

Growth in industrial output fell to 6.6 per cent in July against 6.9 per cent in the previous month. The manufacturing segment - constituting the bulk of the index at 77.6 per cent - grew 7 per cent up from 6.9 per cent in June.

The data came about a fortnight after GDP numbers showed manufacturing to grow to a nine-quarter high of 13.5 per cent in April-June, largely due to a low base effect.

Electricity generation grew by 6.7 per cent in July against 8.5 per cent in June and mining, 3.7 per cent against 6.6 per cent in the previous month. However, this could have been because rainfall during monsoon months usually disrupted mining operations.

Data released by the Society of Indian Automobile Manufacturers indicates that the growth in aggregate auto production eased substantially to 6.8% in August 2018 from the healthy 17.1% in July 2018. Similarly indications on corporate results seemed to show that manufacturing might weaken in August, said economists.

Rating agency ICRA in a note said "Looking ahead, the GST rate cuts and the upcoming festive season may support the momentum of growth of consumer durables, even as possible price rise related to the currency depreciation and higher commodity prices may curtail demand to an extent."