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Inflation moves back to RBI’s target level 

* IIP growth recorded at 13.6% in Jun v/s 28.6% in May

* Manufacturing grew by 13% in Jun and 17 out of 23 industry group posted positive output growth

* IIP grew at 45% YoY in Q1FY22 because of favorable base effect

* High frequency indicators are showing revival in economic activity

* CPI inflation eased to 5.6% in Jul due to decline in food inflation

* CFPI declined to 4.0% in Jul v/s 5.2% in Jun mainly driven by sharp decline in vegetables prices

* Fuel and core inflation remained elevated in Jul

IIP growth eases to 13.6% in Jun as base effect soften

Indian Industrial Production (IIP) grew by 13.6% in Jun compared to 28.6% in May as the base effect softened. Meanwhile IIP grew by 5.7% MoM indicating a sequential improvement in factory output with easing of lockdown restrictions across states. Manufacturing grew by 13% in Jun and 17 out of 23 industry group posted positive output growth during the month. On sequential basis, manufacturing index grew by 7.4% indicates improvement in manufacturing scenario as states eased lockdown restrictions. Mining grew by 23.1% and electricity at 8.3% during the reported month. During first quarter of FY22, industrial production grew by 45% as compared to -35.6% in same period of previous fiscal.

Decline in IIP growth rate to 13.6% in Jun from 28.6% in May indicates that the low base effect of the last year is waning. However, sequential improvement in index is reflecting improvement in manufacturing condition with easing of localized lockdown amid controlled Covid conditions in the country. Sequential improvement is in line with our view and we expect further improvement in output as indicated by high frequency indicators. In July, manufacturing PMI moved back above the critical threshold 50.0 to 55.3 (48.1 in Jun) and GST collection reclaimed Rs1 lakh crore mark in Jul. Other indicators like rail freight, e-way bills and vehicles registrations also showed strong traction in Jul. The RBI, in its latest monetary policy, raised GDP forecast for Q1FY22 to 21.4% from earlier projection of 18.5%, stating that consumption, investment and external demand are on the path of regaining traction.

CPI inflation reduces to 5.6% in Jul

CPI inflation or retail inflation eased to three-month low at 5.6% in Jul and thereby moving back to RBI’s tolerance level after staying above the upper band of 6% for two straight months. Decline in headline inflation was led by low food items prices. CFPI, which comprises 47.3% in inflation index, eased to 4.0% in Jul v/s 5.2% in Jun. Seasonal decline in vegetables prices and deflation in cereals largely contributed to low food inflation. Though inflation in other food items namely fruits, pulses and protein items remained sticky. Fuel inflation at 12.4% in Jul (12.6% in Jun) continue to remain at elevated level due to high crude oil prices. Core inflation eased to 5.9% in Jun from 6.2% in May but still remained at elevated level around 6%. Inflation in key items include cereals & products (-1.8% in Jul v/s -1.9% in Jun), fruits (8.9% in Jul v/s 11.8% in Jun), Vegetables (-7.8% in Jul v/s -0.7% in Jun), protein items (8.3% in Jul v/s 4.8% in Jun), milk & milk products (2.7% in Jul v/s 1.9% in Jun) and housing (3.9% in Jul v/s 3.8% in Jun).

Inflation at 5.6% in Jul moved back to the RBI’s target level after staying above the upper band for two straight months. Significant price reduction in some food items such as vegetables and cereals put downward pressure on inflation. However, price reduction was not broad based across items indicating prevailing pricing pressure. Fuel inflation at 12.4% in Jul and core inflation ~6% remained at elevated level. High fuel prices and increased ability of firms to pass on input cost to consumers amid reviving demand could put pressure on inflation in near term despite favorable base effect. The RBI raised inflation forecast to 5.7% for FY22 from 5.1% earlier forecast.

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