CPI inflation at 77-month peak in Oct, IIP rises 0.2% in September

Retail inflation surged to a 77-month high of 7.61% in October, complicating the task of the Reserve Bank of India at a time when Covid-induced risks to economic growth still remain too high for comfort.

Industrial production, meanwhile, rose 0.2% year-on-year in September, the first growth since February and compared with a 7.4% contraction in the previous month. The growth, however, is aided by a favourable base effect (IIP had contracted by as much as 4.6% in September last year).

Capital goods output shrank for 21 months in a row in September, reflecting gloomy investment climate, although the level of contraction has narrowed to just 3.3% from 14.8% in August. Consumer durables rose by 2.8% y-o-y in September, the first rise after 15th straight month of contraction, in the build-up to the festival season.

But what adds to the policymakers’ woes is the stubbornness of retail inflation. It has remained above the MPC’s tolerance band of 4 (+/-2)% for 10 of the past 11 months, despite purported Covid-induced demand compression in the economy.

While the government believes the spike is mainly caused by temporary supply-chain disruptions in the wake of the pandemic, the RBI on Wednesday pointed out a possible generalisation of inflation.

Food inflation spiked to 11.07% in October, against 10.68% in the previous month, remaining the biggest driver of the Consumer Price Index (CPI).

However, even core retail inflation has risen from about 4% in March to 5.7% in October. In October, core inflation rose by about 20 basis points from the September level, mainly due to elevated pressure from clothing and footwear, housing, health, and recreation and amusement.

Expecting an extended pause in key policy rates, India Ratings chief economist DK Pant said: “The Monetary Policy Committee is in a difficult situation with inflation breaching 6% for three consecutive quarters, growth being low and India having a recession (two consecutive quarters of negative growth) once Q2FY21 GDP numbers are released.”

Icra principal economist Aditi Nayar said: “While a base effect and some softening in vegetable prices may pull down the CPI inflation in the ongoing month, it is expected to recede below 6% only in December 2020. With the level of the headline and core CPI inflation, and the internal dynamics in October 2020 remaining worrying, a rate cut in the December 2020 policy meeting appears to be ruled out.” Even the likelihood of a repo rate cut in February 2021 seems rather low at this juncture, she added.