Inflation at 4-month high in Feb, factory production slows down in Jan

Slowdown in industrial production notwithstanding, a marginal increase in inflation raised the clamour for another round of rate cut by the Reserve Bank on April 4 to boost economic activity.

Illustration: Dominic Xavier/Rediff.com

Retail inflation inched up to a four-month high of 2.57 per cent in February, though it is still below the RBI's benchmark, raising hopes of another round of rate cut in April to boost industrial growth which slipped to 1.7 per cent on account of manufacturing sector slowdown.

According to the data released by the Central Statistics Office (CSO), the Index of Industrial Production (IIP) expanded by just 1.7 per cent in January, significantly down from 7.5 per cent growth in the year-ago month.

The CSO, however, revised marginally upwards the IIP growth number for December 2018 to 2.6 per cent from the earlier estimate of 2.4 per cent.

Slowdown in industrial production notwithstanding, a marginal increase in inflation raised the clamour for another round of rate cut by the Reserve Bank on April 4 to boost economic activity.

The central bank had reduced the key lending rate (repo) by 25 basis points in February.

Following the RBI rate cut, many banks announced up to 10 basis point reduction in their lending rates.

Another set of data released by CSO showed that retail inflation based on Consumer Price Index (CPI) inched up mainly due to firming up of food prices.

Though Headline (inflation) is showing an increase, the core CPI component moderated again to 5.3 per cent in February 2019 from January 2019 level of 5.36 per cent, the country's largest bank SBI said in a research report.

The retail inflation number for February 2019 is the highest since October 2018 when it stood at 3.38 per cent, the data released by the Central Statistics Office under the Ministry of Statistics and Programme Implementation (MoSPI) showed.

On monthly basis, consumer food price index moved up by 0.15 per cent in February against January 2019.

Food inflation was lower at (-) 0.66 per cent in February against 3.26 per cent in the same month last year. The retail inflation in February 2018 was at 4.44 per cent.

In fuel and light category, the rate of price rise slowed to 1.24 per cent from 2.20 per cent in January.

On IIP, SBI said the numbers are disappointing.

The growth rate of manufacturing sector dropped sharply to 1.3 per cent in January from 8.7 per cent in January 2018.

There was also slump in the power generation segment as the expansion was almost flat at 0.8 per cent compared to 7.6 per cent in the year-ago month.

However, the silver lining was the mining sector which grew by 3.9 per cent in January this year compared to 0.3 per cent in the year-ago period.

Giving more details about the factory output in the country, the CSO said capital goods segments, considered to be barometer of investment, and the intermediate goods segment witnessed a contraction.

Data also revealed that both growth in production of consumer durable and non-durable goods grew at a slower rate in January compared to the year-ago period.

The IIP growth during April-January period of the current fiscal stood at 4.4 per cent compared to 4.1 per cent in the same time frame a year ago.

Commenting on the data, B Prasanna, head, Global Markets Group, ICICI Bank said industrial growth dipped below expectations in January 2019, with manufacturing and electricity sectors decelerating considerably.

On monetary policy, Prasanna said: "We expect another rate cut in the April meeting and subsequent action would be data dependent."

Ranen Banerjee of PwC India opined that lower IIP numbers and inflation of slightly over 2.5 per cent give headroom for further monetary policy action by the central bank.

RBL Bank economist Rajni Thakur also suggested that the latest CSO data calls for a rate cut.

"...there clearly is a case and space for one more rate cut of 25 bps by RBI in April to support growth," she said.

The six-member Monetary Policy Committee (MPC) of the RBI will meet for three days and announce the first bi-monthly monetary policy of the next fiscal on April 4.