Retail inflation rose significantly to over three-year high of 5.54 per cent in November

Rising food prices pushed the retail inflation in November to over three-year high of 5.54 per cent, while the industrial sector output shrank for third month in a row by 3.8 per cent in October, indicating deepening slowdown in the economy, government data showed on Thursday.

The retail inflation in November breached the Reserve Bank's medium-term target of 4 per cent, justifying the central bank's decision to keep the benchmark interest rate unchanged in its monetary policy earlier this month.

According to the data released by the National Statistical Office (NSO), costlier vegetables, pulses and protein rich items pushed the consumer price index (CPI) based retail inflation to a 40-month high in November.

The previous high was in July 2016, when retail inflation was at 6.07 per cent. The print stood at 4.62 per cent in October and 2.33 per cent in November 2018.

ICRA Principal Economist Aditi Nayar said that moderation in vegetable prices should douse food inflation to a large extent in early 2020, and healthy groundwater and reservoir levels bode well for rabi output and yields of various cereals.

However, the year-on-year decline in the area sown under rabi pulses and oilseeds poses a concern, given the high inflation being recorded by some of these items.

"ICRA expects the CPI inflation to spike further to 5.8-6 per cent in December 2019, close to the upper threshold of the MPC's medium-term target, driven by the recent revision in telecom tariffs. As a result, we expect the MPC (monetary policy committee of RBI) to remain on hold in its February 2020 policy review," she said.

Inflation in vegetables shot up to 35.99 per cent in November, as against 26.10 per cent in October. Likewise, the prices of cereals and eggs grew at a faster pace of 3.71 per cent. Prices of meat and fish rose by 9.38 per cent annually and of eggs by 6.2 per cent in November.

Prices of pulses and related products jumped 13.94 per cent during the month. In the fuel and light category, prices dropped 1.93 per cent.

On the other hand, the falling output of manufacturing, mining and electricity sectors pulled down the Index of Industrial Production (IIP) in October, as per the official data.

According to the National Statistical Office (NSO) data, the factory output declined by 4.3 per cent in September and 1.4 per cent in August this year, while it grew at 4.9 per cent in July.

Factory output, measured in terms of Index of Industrial Production (IIP), had expanded by 8.4 per cent in October 2018.

Notably, the Indian economy grew at the slowest pace in over six year at 4.5 per cent during the second quarter of the current fiscal. The GDP growth remained at 5 per cent in the first quarter ended June.

During April to October, the IIP growth remained almost flat at 0.5 per cent compared to 5.7 per cent in same period previous fiscal, showed the NSO data.

The manufacturing growth rate declined by 2.1 per cent in October as compared to 8.2 per cent a year ago. Power generation growth slipped sharply by 12.2 per cent in October, compared to 10.8 per cent in the year-ago period.

Mining output too fell 8 per cent in the month under review as against 7.3 per cent in the corresponding period last fiscal. Capital goods production, which is a barometer of investment, declined by 21.9 per cent in October compared to 16.9 per cent rise in the year-ago month.

In terms of industries, 18 out of 23 industry groups in the manufacturing sector have shown negative growth during October 2019 as compared to the same month last year.

The industry group 'manufacture of computer, electronic and optical products’ has shown the highest negative growth of (-) 31.3 per cent followed by (-) 27.9 per cent in 'Manufacture of motor vehicles, trailers and semi-trailers'.

"India's November inflation has surged to 40-month high of 5.54 per cent, that is a 130 bps higher that RBI's medium term target of 4 per cent. This is mainly due to substantial increase in food prices. While Oct IIP print still remains in contraction at -3.8 per cent.

"At this month's policy, RBI refrained from cutting rates due to uptick in CPI despite slow growth. If inflation continues to rise further than RBI may continue to maintain a pause at the February policy," Rahul Gupta, Head of Research - Currency, Emkay Global Financial Services.