May Inflation at 5-Year Low

Consumer inflation fell to its lowest in at least five years in May because of softer food prices, raising hopes the Reserve Bank of India may cut rates to boost the struggling industrial sector. Retail inflation declined to 2.1% in May from 2.99% in April. Separately released numbers showed industrial growth at 3.1% in April, below the upwardly revised 3.8% figure for March.

May's retail inflation is the lowest since the government began issuing data based on the consumer price index in 2012.

Retail inflation is near the lower end of the 2.0-3.5% range forecast by the RBI in the first half of the year. The central bank did not cut rates in its policy review last week, but adopted a less hawkish stance even as it saw inflation picking to 3.5-4.5% cent in the second half of FY18.

RBI kept interest rates unchanged as expected on June 7 amid speculation the government was looking for a more accommodative stance in order to revive growth, which slumped in the March quarter. Both sides have denied any friction between them on this issue.

A good monsoon is expected to keep a lid on food prices and overall inflation, which may force RBI to shift its attention to growth. The next meeting of the monetary policy committee is scheduled for early August.

India's GDP growth slipped to 6.1% in quarter ended March, the lowest in more than two years, as the economy struggled with the effects of November's demonetisation. The impact lingered on in April with consumer durables production contracting 6%.

The manufacturing sector was sluggish with 2.6% growth. The mining and electricity sectors did better with 4.2% and 5.4% growth, respectively.

The outlook is not particularly bright going ahead with the incoming GST expected to cause some disruption.

The contraction in capital goods production by 1.3% indicated difficulty in reviving private capital investment, seen as an essential component of India's revival strategy. The only bright spark in the bright spark in the production numbers was the 8.3% rise in the production of consumer non-durables, or fast moving consumer goods, which suggests some recovery in rural sentiment.

The newly introduced category of construction and infrastructure goods reported a reasonable 5.8% growth in April.

The decline in consumer inflation was led by a sharp fall in vegetable prices. Food inflation turned negative in May at -1.05% against 0.61% in April, as inflation in vegetables and pulses crashed 13.44% and 19.45%, respectively. That's linked to the agitation by farmers in parts of the country in pursuit of loan waivers, which have been granted by Uttar Pradesh, Maharashtra and Madhya Pradesh.

India Ratings attributed the decline in inflation for vegetables and pulses to both the high base of last year and higher production. It expects inflation to remain low and well within the comfort zone of the RBI. Easing crude prices have also added to this.

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