Retail Inflation Eases Marginally In June But Rate Hike On Cards

Consumer price inflation eased slightly to 7.01 per cent in June but was above the central bank's tolerance band for the sixth month in a row, signalling more interest rate hikes could be in store.

June retail inflation rate edged down from 7.04 per cent in the previous month, but stayed above the Reserve Bank of India's target range of 2 - 6 per cent for the sixth straight month, government data released on Tuesday showed.

Separately, factory output growth strengthened to a 12-month high of 19.6 per cent in May from 6.7 per cent in the previous month.

Growth improved for all sectors -- consumer durables registered the highest growth of 58.5 per cent, followed by capital goods. Electricity production recorded the sharpest increase, rising 23.5 per cent year-on-year in May, followed by manufacturing activity (the highest weight in IIP) at 20.6 per cent, a 12-month high.

Commenting on inflation numbers, Finance Minister Nirmala Sitharaman said item-by-item monitoring of prices and pointed attack on inflation will need to continue.

"As RBI has estimated, till the start of the second half of the (fiscal) year, both RBI and government will have to be mindful," she told reporters here.

India's fiscal year is from April to March and the second half would be from October.

"We will have to be mindful and watchful of the price movement," she said. "I will keep monitoring (prices) item by item for anything that goes haywire. This pointed attack on inflation will need to continue."

The finance minister also said a favourable monsoon will lead to good production and rural demand.

The Q1 (April-June) CPI inflation has averaged 7.3 per cent, slightly lower than the RBI's forecast of 7.5 per cent.

Core inflation (at 5.95 per cent) declined to less than 6 per cent after a gap of three months. There was a marginal decline in food inflation to 7.75 per cent in June from 7.97 per cent in May 2022, mainly due to a sharp decline in oil and fat inflation.

Food prices, which account for nearly half of the inflation basket, are expected to remain high due to supply chain issues and crude oil price increases amid geopolitical tensions, analysts said.

Out of 12 sub-categories in food, 10 segments have seen a sequential increase in June, except for edible oil and fruits.

The reduction of supply challenges in case of imported edible oil, lower international prices, and imports at lower duties have helped to moderate domestic prices which are expected to go down further in the near term.

Suman Chowdhury, chief analytical officer at Acuite Ratings & Research, said with a pick-up in monsoon, food inflation should be range-bound in the current fiscal.

"While the continuing depreciation of the rupee has raised the risks of imported inflation, some steps taken by the government such as an increase of crude imports at a discount from Russia and by RBI to conserve foreign exchange may help to address such risks," Chowdhury said.

Expecting July inflation to be 20-30 basis points higher than the June print, India Ratings and Research (Ind-Ra) said it sees the RBI hiking the policy rate by 25-35 bps in the August monetary policy review.

Nikhil Gupta, Chief Economist at Motilal Oswal, said a 25 basis point hike in interest rate is expected next month.

"Going forward, we expect headline inflation to stay around 7 per cent in 2Q FY23 (July-September) and ease towards 6.5% in 4Q (less than 6% in Mar'23)."

In contrast, the Index of Industrial Production (IIP) could grow in double-digits in June, before easing sharply in 2Q, he said.

The RBI hiked the interest rate by 90 bps to 4.9 per cent in two policy meetings. It also revised up its FY23 (ending March 2023) inflation forecast to 6.7 per cent from 5.7 per cent, but maintained the growth forecast at 7.2 per cent.

The Indian economy in the recent months has gathered momentum amid a pent-up demand for services and higher output from industries, as reopening from pandemic restrictions continued. However, the overall price level rise, especially for input costs, is threatening to spoil the ongoing recovery.

On Saturday, RBI Governor Shaktikanta Das exuded confidence that the price situation will gradually improve in the second half of the current fiscal.

He also said the central bank would continue to take monetary measures to anchor inflation with a view to achieving strong and sustainable growth.

The Governor said price stability is key to maintaining macroeconomic and financial stability and the central bank will undertake necessary measures for the same.