ISAS Briefs

The recent numbers of the index of industrial production (IIP) and the consumer price index (CPI) in India have been the cause for some serious concern. The IIP and CPI numbers suggest that even as growth is decelerating, inflation is actually accelerating. Specifically for the IIP, the index declined by 1.6 per cent relative to May 2012, sharply below consensus estimates as there was an anticipation for small positive gains. This, if any, is an early indication that growth projections for the current year will be scaled downwards from their already modest levels. Concurrently, consumer inflation has accelerated at 9.9 per cent over June 2012, about half a percentage point higher than the previous month. Food prices largely contributed to this increase. While it was nonÔÇôcereals in the earlier occasion that caused this inflationary pressure, this time, prices of cereals have increased almost by 18 per cent. 15 July 2013 figures of wholesale price index (WPI) indicated a worsening of inflationary pressures to 4.86%. Reuters reported a drop in industrial production figures (as evident in Exhibit 1), coupled with a volatile WPI inflation. High cost of funds coupled with pressure on net interest margins will constrain the efforts of the Reserve Bank of India (RBI) to reduce interest rates at the next monetary policy review on 30 July 2013.