New Delhi: India suffered a macroeconomic setback on Tuesday with retail inflation unexpectedly accelerating to a 15-month high of 4.88% in November and industrial production slowing to 2.2% in October.

Retail inflation, which rose 3.58% in October, quickened the month after 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.

Separate data released by the government showed that India’s factory output, measured by the Index of Industrial Production (IIP), slowed in October from an upwardly revised 4.14% in September.

While inflation data revealed the growing downside risk of rising crude oil prices, the deceleration in factory output suggests the turnaround in investment and demand is yet to resume in earnest.

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%.

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. “In such a scenario, any adverse supply shock due to geopolitical developments could push up prices even further," it added.

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.

The inflation and IIP numbers were disappointing and the price rise vindicated RBI’s decision to hold rates, said Madan Sabnavis, chief economist at Care ratings Ltd.

“Fuel prices should exert upward pressure on inflation but a reduction in GST (goods and services tax) rates of many items should counteract this to some extent. We don’t expect inflation to cross 5%," he said.

Aditi Nayar, principal economist at Icra Ltd, expected RBI’s status quo on rates to continue. “The continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that CPI inflation is likely to print in a range of 4.4-4.7% in the remainder of FY2018. Our baseline expectation, heading into 2018, remains of an extended pause for policy rates," she said in a note.

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.

The next few months could be crucial, said Sabnavis.

“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)," he said.

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