The Reserve Bank of India, which has already hiked its benchmark repo rate in the last bi-monthly monetary policy, will be closely watching consumer price inflation, which continues to trend upwards and any further pressure, particularly in core inflation and crude oil prices, may drive another rate hike.
However, the RBI will also be watchful of industrial growth, which came in lower than what a few economists had expected. A continued hike in interest rates could just dent corporate investment plans and in turn, wider economic growth. It is like a catch 22 situation.
The government late on Thursday released twin economic data pointers—CPI and IIP (index of industrial production)—and both raised a cause for concern.
CPI inflation rose to a five-month high of 5 per cent in June. The RBI had projected CPI inflation in the 4.8 per cent to 4.9 per cent range for the first half of the current financial year. IIP, on the other hand, slowed to a seven-month low of 3.2 per cent in May.
While food inflation was lower at 2.9 per cent, what continues to be a concern is that all non-food segments have witnessed inflation rates above 5 per cent, noted Madan Sabnavis, chief economist at CARE Ratings.
Also, monsoon rains have so far been erratic and the higher minimum support prices announced by the government could put pressure on food prices.
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"Rising input prices and depreciation in the currency indicates high pipeline inflation. The sticky core inflation and increasing upward risk to overall CPI (our expectation is 5.4-5.8 per cent for FY19) is likely to prompt RBI to tighten its stance going forward," said Dhananjay Sinha, Head of Research and economist at Emkay Global Financial Services.
Crude oil prices have also been a worry for India in the last few months. While brent crude oil prices saw their biggest single-day drop in two years on July 11, prices are still around $73 per barrel and will continue to put pressure on India's current account deficit, considering that 80 per cent of our oil requirements are fulfilled from imports.
"An adverse report on monsoon or a further spike in oil prices could hasten a rate hike in the coming policy," said CARE's Sabnavis.
Shubhada Rao, chief economist at YES Bank, also doesn't rule out another interest rate hike, but feels it may not be as urgent as next month. "Core (inflation) remains elevated that may keep RBI on guard. We have not yet removed the risk of one more rate hike. However, given June CPI print, the urgency for tightening may get diluted," said Rao.
IIP numbers will be a worry. Particularly, the sharp slippage displayed by consumer non-durables to a contraction of 2.6 per cent in May 2018 from the growth of 7.9 per cent in April 2018, is a cause of concern, said Aditi Nayar, principal economist at ICRA.
Nayar, however, feels IIP may pick up in June, led by an improvement in electricity and manufacturing as well as a favourable year-on-year base effect.