July CPI rises to 6.07%, June IIP growth improves at 2.1%

June CPI was at 5.77% while May IIP was 1.2%

Soaring food prices in July kept India's headline inflation above the Reserve Bank of India's (RBI) near-term target, underscoring the challenge facing the next central bank governor.

Consumer prices rose at a faster-than-expected pace to 6.07% last month from a year ago, up from June's 5.77% annual gain, government data showed on Friday. Economists surveyed by Reuters had expected retail inflation to come in at 5.90%.

It is the fourth straight reading above the RBI's target of 5% by March 2017.

Separately, industrial production expanded 2.1% in June from a year earlier, faster than a revised 1.1% rise, government data showed.

The rise was primarily led by expansion in electricity and mining production.

The industrial output data is based on an old series not reflected in India's current gross domestic product figures. As a result, analysts set little store by those numbers as a guide to the economy's broader health.

At his last monetary policy review on Tuesday, central bank chief Raghuram Rajan left key interest rates unchanged, flagging upside risks to the inflation target.

The former International Monetary Fund chief economist is due to step down as RBI governor on Sept. 4, after a three-year term, to return to academia.

While Prime Minister Narendra Modi's government has yet to pick a successor, it has bound the next governor with Rajan's retail inflation target of 4%, with a band of 2% on either side, for the next five years.

Retail food prices surged 8.35% year-on-year last month, much faster than a 7.79% annual increase in June.

Above-average monsoon rains this summer have raised hopes of a boost to farm output and an ensuing drop in food inflation. Already, there are signs vegetable prices are edging down.

However, the outlook for core inflation remains uncertain due to a shrinking output gap and an expected pickup in demand-driven price pressures, following full implementation of a major hike in government salaries and pensions.

Pay hikes are also expected to make it tougher for Finance Minister Arun Jaitley achieve the fiscal deficit target of 3.5% of GDP in the current fiscal year.

Jaitley told lawmakers on Friday he would need more money to cover the payout.

A looser fiscal stance could boost inflationary expectations, economists warn, as the government pays higher wages and keeps capital investment high in the hope that private sector activity will then pick up.

"The central bank faces a difficult task in meeting its inflation targets," said Shilan Shah, India economist at Capital Economics.

SALES-TAX IMPACT SEEN

The roll-out of a new national sales tax planned for next April is also expected to push up inflation. A government-appointed panel has suggested a standard Goods and Services Tax rate of 17% to 18%, but India's states want a higher level.

Morgan Stanley reckons a higher rate could push up retail inflation as much as 0.7%age points.

Economists don't see much steam left in the RBI's current easing cycle, in which the policy repo rate has come down by 150 basis points since January 2015, to its lowest in more than five years.

Most expect another cut of 25 basis points by December, before the central bank hits the pause button. But much will depend on who replaces Rajan.

"The appointment of a more dovish candidate as the next governor would raise the chances of further monetary loosening," Shah said.

The IIP growth however was down from 4.2% a year ago, on account of poor show by manufacturing and heavy contraction in capital goods production.

On cumulative basis, the factory output in the April-June quarter grew by 0.6% compared to 3.3% growth in the year-ago period.

The June growth was however higher than 1.1% (revised from 1.2% provisionally) in May.

Factory output, measured in terms of the Index of Industrial Production (IIP), showed that the manufacturing sector that constitutes over 75% of the index saw a meager growth of 0.9% in June compared to 5.2% a year ago.

For the April-June quarter, this sector's output showed contraction by 0.7%, as against a growth of 3.7% a year ago.

The capital goods output registered a steep decline of 16.5% in June over a contraction of 2% in last year. In April-June, the production of these goods, which are considered as barometer for investment, declined by 18% compared to a growth of 2% in year ago period.

Growth in output of consumer durables decelerated to 5.6% in June compared to 16.1% a year ago. The consumer non-durable goods also recorded low growth of 1% in June compared to 2.3% a year ago.

Overall, consumer goods production recorded a growth 2.8% in June compared to 7.2% a year ago.

However, the power generation recorded an impressive growth of 8.3% in June compared to 1.2% in the same month a year ago.

The mining sector recorded a growth of 4.7% in June year as against a contraction of 0.4% a year ago.

In terms of industries, 18 out of 22 industry groups in the manufacturing sector have shown positive growth during the month of June.

As per Use-based classification, the growth rates in June 2016 over June 2015 are 5.9% in Basic goods, (-)16.5% in Capital goods and 6.1% in Intermediate goods.