Inflationary pressures in India rise; domestic, external growth continue to give mixed signals

A slew of data released implies that inflationary pressures in India have risen, whereas domestic and external growth continues to give mixed signals. Inflation last month accelerated markedly. It was driven by core and food prices. India’s CPI was up to 6.1 percent in July on year-on-year terms, above consensus expectations. On monthly basis, the CPI moderated slightly to 0.3 percent from June’s 0.4 percent.

Meanwhile, core inflation rebounded in July following a surprising downside print recorded in June. Price pressures were mostly witnessed in personal care items, household goods and services and recreation and amusement spending. Food prices are likely to ease later in 2016 if rains continue to be strong; however, the rise in core prices is expected to keep RBI wary.

“We expect the central bank to reach its 5 percent target by early 2017, but perhaps not by a very comfortable margin, opening up space for just one final rate cut in 4Q,” said HSBC in a research report.

Meanwhile, growth indicators continue to be confusing. Industrial output in the country rebounded on the back of improved consumer demand from rural areas. However, capital goods dropped again following a solid print in May. Industrial production in India grew 2.1 percent year-on-year in June, above consensus expectation of 1.6 percent.

The IIP index kept on rebounding, aided by solid consumer, basic and intermediate goods. Electricity and mining showed the most solid improvement, whereas manufacturing indicated an additional measured improvement, stated HSBC.

On the trade front, deficit narrowed in June to USD 7.8 billion on severe decline in imports, despite exports weakening following three straight months of sequential growth. Imports declined sharply throughout the board because of subdued oil, gold and core imports.

The correction in core imports, which is a proxy for domestic demand, to a certain extent shows a pay-back after two months of solid sequential improvement, stated HSBC. On the other hand, exports decelerated after three months of steady growth. The weakness in exports was mainly due to chemicals and engineering goods.