New Delhi: Retail inflation slowed for the third consecutive month to a two-year low in February, data released on Wednesday showed, providing election-eve relief to the incumbent Congress-led United Progressive Alliance (UPA) and political parties that are in power in the states.
Inflation measured by the Consumer Price Index (CPI) decelerated to 8.1% last month, from 8.79% in January.
Significantly, the rate is now closer to the target of 8% set for January 2015 by a Reserve Bank of India (RBI) committee led by deputy governor Urjit Patel.
Separately, new data put out by the government showed that factory output grew by a meagre 0.1% in January after having contracted for three consecutive months, in an indication that industrial recovery is still far off. Still, the number is expected to improve starting in February, with excise duty cuts boosting auto sales, Citigroup India economist Rohini Malkani wrote in a research note.
Industrial output had fallen 0.2% in December from a year earlier, according to the revised number.
Together with the wholesale price index-based inflation data to be released on Friday, the latest updates on the state of the economy will provide crucial inputs to RBI ahead of the monetary policy review due on 1 April.
A relentless rise in prices in the past couple of years, coupled with faltering economic growth, has hurt the electoral prospects of the incumbent UPA, which has been in power for 10 years. It’s seeking a third successive term in the general election due to kick off from 7 April and conclude on 12 May.
In the state assembly elections last year in November-December, the Congress suffered defeat in four of the five states that went to polls. Congress leaders have attributed the party’s setbacks to the persistent inflation, especially high vegetable prices.
Analysts said the central bank is unlikely to cut key policy rates in the upcoming policy review to support economic growth because inflation risks have not receded fully. Uncertainty over the annual monsoons has only complicated policy arithmetic.
“The summer months will impact perishables. Also, the recent seasonal rains seems to have done some damage to standing food crops. There is also the likely El Niño factor and its impact on agriculture to consider,” saidShubhada Rao, chief economist, Yes Bank. “We expect a prolonged pause from the central bank on rates. Though the current inflation number is broadly along the RBI trajectory of 8%, there are upside risks to food inflation in the coming months, which the central bank will consider.”
“On the positive side, softer commodity prices and a stronger rupee will provide support to core inflation,” she said.
El Niño is a phenomenon caused by the warming of the Pacific that affects the weather, bringing either drought or excess rainfall in parts of the world.
The latest numbers, however, increased the clamour for a rate cut by industry.
Chandrajit Banerjee, director general of the Confederation of Indian Industry, said in a note that the moderating inflation numbers and the contracting manufacturing sector “should spur the RBI to give a predominance to growth and cut interest rates in its forthcoming monetary policy as the negative growth of capital and consumer goods especially consumer durables reinforce the view that escalating interest costs are impeding investment revival.”
According to data released by the ministry of statistics and programme implementation (Mospi) on Wednesday, rural inflation continued to outpace urban inflation. While rural inflation was at 8.51%, urban inflation was lower at 7.55%.
Separate Index of Industrial Production data released by the ministry showed that the manufacturing sector contracted 0.7% in January, even as mining and electricity production expanded 0.7% and 6.5%, respectively.
Output in the capital goods segment, a key indicator of investment demand in the economy, contracted 4.2% in January. Basic goods and intermediate goods production expanded 0.9% and 3.4%, respectively.
While consumer durables contracted 8.3% in the month, consumer non-durables grew 4.4%. In the April-January period, growth in factory output was flat with mining and manufacturing contracting by 1.5% and 0.4% respectively and electricity growing at 5.7%.
Madan Sabnavis, chief economist at CARE Ratings, said there was no turnaround in either consumption or investment as reflected by the contraction in capital goods and consumer goods segments.
“The numbers indicate that a turnaround is still to come. It reinforces the fact that investments are not taking place in the economy. Given the high interest rates, no promoter will make investments unless absolutely necessary,” he said.
RBI, however, is expected to maintain status quo on rates for the next few months, he added.