New Delhi: India’s retail inflation crossed the upper tolerance level of 6% jointly set by the central bank and the government for the first time in 23 months in July and factory output growth remained tepid in June, according to data released on Friday, days after the Reserve Bank of India (RBI) flagged upside risks to the inflation target.

The acceleration in the Consumer Price Index (CPI) to 6.07% in July from 5.77% in June came on the back of rising food prices, despite above-normal monsoon rainfall.

Prices of eggs, cereals, pulses and sugar rose compared with their level a year ago, while vegetable prices softened marginally.

A Reuters poll of economists had projected retail inflation to have risen 5.9% in July.

The Index of Industrial Production (IIP) picked up in June to 2.1% from 1.1% a month ago on the back of mining and electricity output. Manufacturing output, which constitutes 75.5% of IIP, grew by a meagre 0.9%, mirroring overcapacity in the economy and tepid demand recovery.

In the April-June quarter, factory output grew 0.6%, compared with 3.3% a year ago.

In his last monetary policy review on Tuesday, RBI governor Raghuram Rajan left key policy rates unchanged, flagging upside risks to the inflation target.

July consumer price inflation was surprisingly high, but unlikely to stay at that level, said Indranil Pan, chief economist at IDFC Bank Ltd, noting that it was partly due to a low base effect.

“The upside surprise came from non-alcoholic beverage and sugar prices. Going forward, even as headline inflation corrects lower, still the glide towards 5% by March 2017 is not absolutely evident. Overall, this is unlikely to change RBI’s monetary reaction function and RBI is likely to remain on hold for an extended period," said Pan.

Aditi Nayar, senior economist at rating company Icra Ltd, said food price inflation may ease in the coming months, helped by a favourable base effect, monsoon rains and kharif crop sowing.

Boosted by ample rains across the country, planting of rain-fed kharif crops have been completed in 95.4 million hectares, 7% more than the area usually planted by this time of the year, according to data released by the agriculture ministry on Friday.

Data from the India Meteorological Department showed that the rainfall recorded till Friday in the ongoing June-to-September southwest monsoon season is in excess of normal by 3%. About 93% of the country has received normal-to-excess rainfall so far.

“Higher global food prices and the anticipated improvement in domestic demand after the implementation of the pay commission’s recommendations pose modest risks to the inflation trajectory," added Nayar.

Production of capital goods, a proxy for investment demand in the economy, shrank for the eighth consecutive month in June.

Output of consumer non-durables, representing items such as eatables, soaps and shampoos, often used as a proxy for rural demand, turned positive (1%) for the first time in after seven months of contraction.

Production of consumer durables, which include refrigerators, television sets and automobiles, grew by a robust 5.6% in the month.

According to data released by the Society of Indian Automobile Manufacturers, sales of passenger vehicles, which include cars, utility vehicles and vans, rose 16.78% in July, increasing for the 13th month in a row and at the fastest pace since October.

RBI, in its monetary policy statement on Tuesday, said the strong improvement in sowing on the back of the monsoon’s steady progress, along with supply management measures, augur well for food price inflation to ease.

“The prospects for inflation excluding food and fuel are more uncertain; if the current softness in crude (oil) prices proves to be transient and as the output gap continues to close, inflation excluding food and fuel may likely trend upwards and counterbalance the benefit of the expected easing of food inflation," RBI warned.

In addition, the full implementation of the recommendations of the Seventh Central Pay Commission in terms of payment of allowances will affect the magnitude of the impact house rents have on CPI, it said.

The central bank said the momentum of economic growth is expected to quicken with a normal monsoon raising agricultural growth and rural demand, as well as with the stimulus to consumption spending that can be expected from the disbursement of pay, pension and

arrears following the implementation of the pay commission’s award.

On the passage of the goods and services tax (GST) constitution amendment bill in Parliament, RBI said it augurs well for the growing political consensus over economic reforms.

“While timely implementation of GST will be challenging, there is no doubt that it should raise returns to investment across much of the economy, even while strengthening government finances over the medium-term. This should boost business sentiment and eventually investment," it added.

The government last week formally backed RBI’s inflation strategy by notifying a retail inflation target of 4% with a two percentage point variation on either side as an anchor for monetary policy till March 2021.

“Fixation of an inflation target while giving due emphasis to the objective of growth and challenges of an increasingly complex economy is an important monetary policy reform with necessary statutory back-up," the government said in a statement.

The final step in institutionalizing a new monetary policy framework would be the setting up of the monetary policy committee.

In a June notification, the government said a six-member monetary policy committee would decide key policy rates.

Rajan, in a press conference after his last monetary policy review, said the governor, deputy governor Urjit Patel and executive director Michael Patra will represent RBI on the committee. The government is in the process of finalizing the other three members.

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