There was some cheer on the economy front on Wednesday with the retail inflation dipping to a three-month low of 4.3% in April and industrial production growing 22.4% in March.
Mainly a base effect phenomenon, the lower inflation is unlikely to lead to interest rate cuts in the near future. The RBI’s Monetary Policy Committee (MPC) is to meet next month to discuss the policy rate. As the Covid second wave-induced uncertainty is high and the inflation is expected to be around 5% during the first six months of the current fiscal year, the MPC is likely to be on the pause mode, with an accommodative stance.
Retail inflation based on the Consumer Price Index (CPI) in April slipped to 4.29% from 5.52% in March, led mainly by the halving of the food inflation to 2.02% from 4.87%. The dip in vegetable prices was the reason; vegetable inflation dropped over 14%.
However, prices of edible oils, fruits, meat & fish, and eggs are yet to cool down. Inflation for oils and fats surged 26%. For, meat & fish, the rate of inflation was over 16.5% while for egg it was nearly 11%.
Fuel inflation also remained elevated at around 8%. This is likely to go up further, with the almost daily increase in the prices of petrol and diesel. All this is expected to have an impact on headline inflation.
DK Srivastava, Chief Policy Advisor, EY India, said the downward movement of inflation was primarily driven by a fall in food and beverages and transport and communications inflation rates. This was in spite of an increase in the ‘fuel and light’ category.
This pattern is indicative of cost-push inflation operating through petroleum prices, even as a lower demand for food and beverages, clothing and footwear, transport and communications, and miscellaneous goods drives down the overall inflation rate.
“The policy message is that the government needs to support demand without getting excessively concerned about the pressure on prices of petroleum products,” he said.
The Index of Industrial Production (IIP) in March surged 22.4%, mainly on base effect as in the same month last year, the nation had gone into a stringent lockdown while manufacturing grew 25.8%, electricity production rose 22.5%. April may see a still higher number considering the severe contraction last fiscal.
Vivek Rathi, Director (Research) at Knight Frank India, feels that the Indian economy was coping well with the pandemic that created challenges until the second wave hit. Hence, economic indicators relating to the period before April, when most regional lockdowns were announced, will not capture the impact of the present turbulence on the ground. “With productions holidays and factory shutdowns announced during this second wave, we need to brace for greater impact going forward even as the base effect determines the number movement,” he said.