The retail inflation rate galloped to a 95-month high in April at 7.8 per cent, paving the way for more policy rate hikes by the central bank even as factory output growth remained lacklustre at 1.9 per cent in March, signalling weak domestic demand.
The sharper than expected spike justified the surprise off-cycle rate hike by the Reserve Bank of India (RBI) last week by 40 basis points, with inflation remaining above the central bank’s upper tolerance limit for four consecutive months. The data released by the National Statistical Office showed the food inflation rate in April spiralled to 8.38 per cent as prices of edible oils and vegetables shot up by 17.3 per cent and 15.4 per cent, respectively.
Fuel inflation also breached the double-digit mark at 10.8 per cent in April due to rising retail prices of petrol, diesel, and cooking gas even as crude oil prices softened from March.
The second round impact of higher energy prices has become visible with transport and communication prices rising in double digits by 10.9 per cent. The services sector inflation rate rose to a 115-month high at 8.03 per cent as household goods and services (7.79 per cent) and personal care (8.62 per cent) inched up.
Suvodeep Rakshit, senior economist at Kotak Institutional Equities, said while the April headline inflation might have been the peak for the year, he did not expect the rate to go below 6 per cent for the rest of the year with prints over the next few months remaining 7-7.5 per cent.
“Over the next few months we should be focusing on movements in edible oil prices, crude oil prices, fuel price hikes, kharif minimum support price announcements, and the pass-through of input prices by companies,” he added.
The dismal performance of the index of industrial production (IIP) was led by manufacturing, which grew 0.9 per cent, while mining and electricity grew 4 per cent and 6.1 per cent, respectively.
According to the use-based classification, capital goods (0.7 per cent) growth remained subdued while infrastructure goods grew at a robust pace of 7.3 per cent. However, the output of consumer durables (-3.2 per cent) contracted for six consecutive months while consumer non-durables (-5 per cent) also shrank for the second successive month.
Sunil Kumar Sinha, principal economist at India Ratings and Research, said the pattern of growth in the IIP suggested that weak consumption demand was likely to witness more headwind in the coming months from high inflation and the reversal of the interest rate cycle, but the demand for infrastructure goods might continue due to sustained government capex spending.
“The continued weakness in capital goods does not augur well for the recovery. The hope that private corporate investment may finally pick up in FY23 may get delayed in view of the global uncertainties caused by the Ukraine conflict and its effect on the domestic economy,” he added.
D K Srivastava, chief policy advisory at EY India, said given the inflationary trends, the RBI might consider increasing the policy rate further by 50 basis points or more in one or two steps.
“With higher interest rates, investment and growth may be adversely affected. But there may be a positive spin-off due to higher growth in taxes linked to higher nominal growth. This additional fiscal capacity may be partly used to reduce Union excise duty on petroleum products with a view to containing inflation and partly to frontload infrastructure investment in the initial months of FY23 to support growth,” he added.