On the other hand, retail inflation, particularly food inflation is gaining further ground because now even cereals inflation has firmed up above 3% after a gap of 16 months. Ind-Ra believes upside pressure from food inflation will remain a matter of concern as policymakers and the government cannot do much to control the prices of agricultural commodities such as pulses, vegetables and sugar.
Industrial production increased 1.2% yoy in May 2016 against a contraction of 1.3% in the previous month. The growth in factory output was primarily led by positive growth in the manufacturing sector. Manufacturing (75.5% weight in IIP) output increased 0.7% yoy in May 2016 after two consecutive months of negative growth (April: negative 3.7%; March: negative 1.0%). Electricity, which has a weight of 10.3% in IIP, moderated to 4.7% in May 2016 from 14.6% yoy in the previous month. Mining output increased marginally to 1.3% yoy in May from 1.1% in April 2016. Mining growth has oscillated in the range 0.3% to 5.3% since July 2015.
At the used-based level, capital goods output continued its negative trend although it moderated from the previous month. Capital goods output contracted 12.4% yoy in May 2016 against a contraction of 25% in April 2016. Basic and intermediate goods continued with the positive trend and clocked growth rates of 3.9% yoy and 3.6% yoy respectively in May 2016. In-Ra believes a pick-up in capital goods output will require a further improvement in the manufacturing sector activity.
Consumer durables maintained the positive growth trend and grew 6% in May 2016 (April 2016: 11.8%). Negative growth in consumer non-durables moderated to 2.2%yoy in May 2016 from 10.8% yoy in the previous month. A pick-up in rural demand in the wake of above-normal monsoon is likely to give a fillip to both consumer durables and non-durables.
CPI came in at 5.77%yoy in June 2016, almost unchanged from 5.76% in the previous month, led by continued high food prices. Food inflation rose to 7.8% yoy in May from 7.5% yoy in the previous month. Food inflation remains at a much higher level compared to the same period in the previous year (June 2015: 5.4%; May 2015: 4.8%), which is remarkable since 2015 was a drought year. Retail pulses inflation moderated but still remains in high two-digit levels (26.9% yoy in June from 31.6% in the previous month). Vegetable price rose sharply to 14.7% yoy in June from 10.8% in the previous month. Sugar inflation increased to 16.8% yoy in June from 14.1% yoy in the previous month.
Cereals inflation rose to 3.1%yoy in June 2016 from 2.6% yoy in the previous month. Monsoon would have some softening impact on cereals inflation. Rainfall recorded a surplus of 1% (from an 18% deficit a fortnight ago) for the long-period average between 1 June and 6 July 2016. Also, the government can intervene in case of cereals and stabilise prices by increasing supply from the buffer stock. Given the supply and demand gap in pulses, prices are unlikely to see a significant moderation.
Core inflation (non-food non-energy) remained benign as subdued demand kept a check on manufactured products prices. Core inflation moderated to 4.6% yoy in June from 4.8% in the previous month. Fuel price inflation remained unchanged from the previous month at 2.9% yoy in June 2016.
While the room to cut rates in the August 2016 monetary policy may not be available, Ind-Ra believes the headroom may open up in 3QFY17. The bond market gained momentum following the resurgence of rate cut expectations. The debt market is likely to continue its positive momentum, gaining on account of low global yields, softness in crude oil prices and expectations of monetary measures by central banks globally. Additionally, an improvement in liquidity will continue supporting steepening of the yield curve.
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