Inflation Drops Slightly To 6.26% in June, IIP At 29.3%

India's retail inflation fell slightly to 6.26 per cent in June, but stayed above the Reserve Bank's tolerance range for the second straight month, government data showed. The Index for Industrial production on the hand for the month of May rose 29.3 per cent due to a low-base effect when compared with last year.

"After having risen sharply in May, June inflation has stabilised near the same levels, printing 6.26% vs our expectations of 6.61%. While the low base continued to impact the YoY headline print, the sequential increase has been much more muted than the sharp surge seen in May. Specifically core inflation is down to 6.19% from 6.36% earlier, with almost negligible sequential increase (nsa). We note May month saw substantial increases in some of services categories like health, recreation and Personal Care and Effects which did not really fit the slower demand narrative for the period.

For June The food component saw sequential increase led by vegetables, eggs and edible oils. Overall, The June print is a positive surprise and should augur well for the inflation estimates ahead, and could also push the inflation average for the year near RBI's average if the momentum remains tamed.

We remain watchful of pass through of impending cost push pressures in core goods inflation, while re-opening-led ensuing demand revival in select contact-sensitive household services could pressure core services inflation ahead. However, MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable, '' Madhavi Arora, Lead Economist, Emkay Global Financial Services said.

"IIP grew 29.3% YoY in May'21, only slightly lower than the Bloomberg consensus of 32%, while much higher than our forecast of 16%. It means that while core index (weight 40%) grew 17%, non-core items grew 41% in the month (v/s 42% fall in May'20). We expect IIP to stay broadly flat in Jun'21, before moving slightly into positive territory from July onwards," says Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services Ltd.