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Festive breather as CPI dips to 3.28%, IIP jumps to 4.3%

Economists see see the easing in CPI inflation as a temporary phenomenon

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In a minor relief to the government after a string of disappointing macroeconomic numbers, retail inflation came 0.08 percentage points lower in September at 3.28% even as factory output rose 3.4 percentage points to 4.3% in August, according to official statistics released on Thursday.

The slight dip in the retail inflation last month from August's 3.36%, notwithstanding, it continued to be under pressure from rising prices of fuel, housing, and with the base effect from last year wearing off, many economists expect it to inch up again.

They see the easing in the CPI inflation as a temporary phenomenon and expect it to "fall in line" with Reserve Bank of India's (RBI) projection of 4.2%-4.6% in the second half of the current fiscal.

"It is a temporary because it is a seasonal effect. I think these figures (CPI and IIP) are positive but not strong enough to merit a reduction or revision in repo rate (by the central bank)," said D K Srivastava, chief policy advisor, EY India.

He expected festive season upsurge to improve retail inflation numbers in the second and third quarters; "RBI has accounted for these positive effects. So, I don't think they are still out of line".

Aditi Nayar, principal economist of Icra, also believes that "unfavourable output projected by the First Advance Estimates of crop production and a continued reversal of the favourable base effect, could result in retail food inflation rising somewhat in the ongoing month".

She also said that there could be a "staggered impact" of the revision in HRA of central government employees on the housing index of the CPI that could push it up in future.

"Moreover, the pass-through of the goods and services tax (GST) to final prices of various goods and services may not be complete. Overall, we expect the CPI inflation to cross 4.0% in the ongoing quarter and exceed 4.5% in March 2018," she forecast.

According to her, even in September easing of food inflation in September compared to August had been "offset" by a rise in inflation for housing, on the back of the HRA revision, as well as fuel and light, and pan, tobacco and intoxicant.

"As a result of the uptick in inflation for housing, and pan, tobacco and intoxicants, core inflation rose to 4.6% in September 2017 from 4.5% in the previous month," she said in a statement issued by ICRA.

Nayar said despite firmer crude prices, slash in VAT and the recent cut in central excise duty would "dampen" inflation related to transport and communication in the current month.

Crisil also foresees inflation to inch up "from bump-up in oil prices, and higher household spending led by (i) implementation of farm loan waiver and (ii) an expected upward revision in salary and allowances of state government employees. Yet, domestic food inflation is expected to stay low aided by a good monsoon, and this will play a key role in keeping overall inflation in fiscal 2018 low".

It expected the CPI to average at 4% in fiscal 2018, down from 4.5% in fiscal 2017; "If growth declines further, it can potentially bring down core inflation, too. A dip in the core can provide a faster downside to overall inflation".

Radhika Rao, India economist, DBS Bank, also expects inflation to climb to 3.5%-4% by the end of the current fiscal; "barring a sharper pullback in the core and the likelihood that unfavourable base effects might take inflation back towards 3.5-4% by end-year, lowers the scope of a return to an easing policy cycle for the time being".

For Srivastava, of the two figures put out by the government, IIP was "better news" as it showed a "significant" jump. However, he said; "we have to see for another two months or so to ascertain whether this is a clear shift in the direction of the growth in manufacturing".

He also felt that a 4% growth in factory output did not convey high growth rate; "It is higher than the previous month but it is still a low growth rate. We have to wait for it to at least go up to 7%-8%".

Crisil viewed the upturn in IIP growth in August as petering out of disruptive impact of GST on manufacturing.

"The sharp upturn in IIP may be indicative of restocking exercise before the commencement of festive season in the economy," it said.

There was widespread concern after IIP number slumped to 48-month low in June to 0.1%. Experts had attributed it to government's currency note ban and disruptive effect of GST.

SHORT-LIVED?

  • Economists see see the easing in CPI inflation as a temporary phenomenon.
     
  • They expect it to “fall in line” with RBI projection of 4.2%-4.6%
     
  • There could be impact of revision in HRA of central govt staff
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