Consumer price inflation rises close to 5 per cent in November 2017, industrial output slows down

India’s retail inflation unexpectedly accelerated to a 15-month high of 4.88%   in November 2017 while industrial production slowed down to 2.2% in October. Retail inflation, which rose 3.58% in October, rose in the subsequent month mainly on account of rising fuel and food prices. While fuel price inflation accelerated to 7.9%, food price inflation was up 4.4% in November. The inflation data thus revealed the growing downside risk of rising crude oil prices. Reserve Bank of India (RBI) had flagged the upward pressure on inflation including rising fuel prices and the increase in house rent allowance (HRA) to central government employees in its monetary policy review earlier this month, when it kept policy rates unchanged. It had estimated that retail inflation will be around 4.3-4.7% in the third and fourth quarter of 2017-18.

The central bank said that the recent rise in crude oil prices may sustain, especially on account of Organization of the Petroleum Exporting Countries’ decision to maintain production cuts through next year. According to the RBI, any adverse supply shock due to geopolitical developments could push up prices even further. Crude oil prices reached a 30-month high on Tuesday at $65 a barrel, indicating that pressure on inflation, at least on account of fuel, is expected to continue.

 Separate data released by the government showed that India’s factory output, measured by the Index of Industrial Production (IIP), slowed in October 2017 from an upwardly revised 4.14% in September. While mining output was stagnant in October, manufacturing and electricity grew at 2.47% and 3.2%, respectively. Capital goods production, which indicates investment demand in the economy, grew for a third consecutive month in October, by 6.8%. However, consumer durable goods contracted for the second consecutive month at 6.9%.  According to analysts, there was volatility in production data due to implementation of GST. However, it was expected that this would stabilize. If output does not pick up in November and December, the stagnation could continue till March. Only infrastructure, steel and automobiles are doing well. Rest of the sectors are lagging (behind).  The deceleration in factory output suggests the turnaround in investment and demand is yet to resume in earnest.

It needs to be noted that India’s gross domestic product (GDP) growth rebounded to 6.3% in the quarter ended 30 September from 5.7% in the June-ended quarter as activity in the manufacturing sector accelerated. RBI estimates that the Indian economy will grow at 6.7% in 2017-18, which suggests a significant improvement in the second half of this fiscal year.

Reserve Bank of India (RBI) had flagged the upward pressure on inflation including rising fuel prices and the increase in house rent allowance (HRA) to central government employees in its monetary policy review earlier this month, when it kept policy rates unchanged. It had estimated that retail inflation will be around 4.3-4.7% in the third and fourth quarter of 2017-18.

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