Prices, trade data may bring some cheer

Industrial growth may dip, but economists see improvement after July

Macroeconomic data on inflation and trade due this week could spring a pleasant surprise.

Retail inflation is expected to trend down to 5.2-5.5 per cent after rising to a 23-month high of 6.07 per cent in July. The current account may post a surplus after nine years of deficit and while industrial growth in July could dip, economists said it might be a one-off. According to HSBC, the updated PMI index suggests that activity improved markedly in August.

These will be the last bits of macroeconomic data available to RBI before its next monetary policy review scheduled on October 4.

Inflation measured by the consumer price index (CPI) had risen to 6.07 per cent in July from 5.77 per cent in the previous month on higher food prices. Food inflation edged up to 8.35 per cent in July, driven by pulses (27.53 per cent), sugar (21.9 per cent) and vegetables (14.06 per cent). But the consensus among economists is inflation will trend down.

"We expect CPI inflation at 5.3 per cent in August on a favourable base effect for food inflation and healthy kharif sowing. We expect sizeable declines in vegetables and pulses inflation," said Aditi Nayar, senior economist at ICRA.

"Inflation is likely to be 5.5-5.6 per cent, largely due to the base effect and cooling vegetable prices in August," said Madan Sabnavis, chief economist at CARE.

The area under kharif sowing has climbed to 103.3 million hectares from 99.7 million hectares last year. The area under pulses has risen to 14.2 million hectares from 10.7 million hectares last year.

Retail food prices could be driven down in anticipation of increased supply as traders try to offload stocks. This could close the gap between wholesale and retail prices in coming months. "Retail inflation may well have peaked in July," Nayar added.

According to economists, the Index of Industrial Production (IIP) is likely to rise 1.2-1.4 per cent in July, down from 2.1 per cent in June. Coal production slumped to 5.1 per cent in July, down from 12 per cent in June. Electricity generation declined to 1.6 per cent in July from 8.1 per cent in June.

"The outlook for the manufacturing sector in August has brightened with the sharp pick-up in automobile production," Nayar said.

The current account may turn positive in the first quarter after being in deficit for the better part of the previous nine years. HSBC estimates a surplus of 0.1 per cent of the GDP, while ICRA expects a $2 billion surplus.

Gold imports are likely to have fallen to a five-month low and may have offset any increase on account of higher oil prices, but these could rise ahead of the festive demand.

HSBC estimates the trade deficit to narrow to $6.7 billion in August from $7.8 billion in July. According to ICRA, the trade deficit is likely to remain in the single digits for the eighth month in a row. If this trend were to persist through the year, the current account deficit may come in lower than the predicted 1.3-1.5 per cent of GDP.

With lacklustre industrial growth and low inflation, calls for the RBI to cut interest rates in its next monetary policy review may grow. But the central bank might wait for a confirmation of the inflation trend and second-quarter GDP data for a better sense of the investment scenario.

"Chances of a rate cut now are low," said Devendra Pant, chief economist, India Ratings and Research. "We expect the RBI to cut rates by 25 basis points (a basis point is a quarter of a percentage point) in December," Sabnavis added.