Weekly Economic Update

In the local economic news, retail inflation for the month of June eased slightly to a level of 6.26 per cent from a level of 6.3 per cent in the month of May. However, the higher inflation reading is above RBI's inflation target of 6 percent for  the second consecutive month. In terms of food prices within the inflation basket, it came in with a reading of 5.15 per cent in June vs 5.01 per cent in May. The fuel & light segment posted a sharp increase of 12.68 per cent in June, driven by the momentum in recent price increases of petrol & diesel. One positive was the easing in June 2021 wholesale inflation, which eased to 12.07 per cent vs a high of 12.94 per cent in the month of May.  

In other noteworthy news, the index of industrial production (IIP) recorded a large increase of 29.3 per cent in May on a YoY basis as the year-ago period was impacted due to the national level lockdown. While the manufacturing sector output expanded by 34.5 per cent, mining output increased by 23.3 per cent and power generation rose by 7.5 per cent in May. For reference, IIP had contracted 33.4 per cent in May last year. Clearly, the economy is in a turnaround mode and the IIP should continue to strengthen in the coming months.  

In the global economic and market news,  even as the Chinese central bank cut reserve ratio requirement (RRR) to boost the economy, the country’s economy slowed to a pace of 7.9 per cent for the quarter ended June 30. This is below expectations for growth of 8.1 per cent. However, retail sales rose by a larger than expected 12.1 per cent during the period. Notably, growth was down from a torrid pace of 18.3 per cent during the first quarter. The reserve ratio cut is expected to release the US $ 154 billion in liquidity for the economy.    

In the US, inflation continued to climb in the month of June. The consumer price index posted an increase of 5.4 per cent in June compared to a year-ago period. This was the largest monthly gain since August 2008. Interestingly, US Federal Reserve head Jerome Powell in prepared remarks to the US Congress has noted that elevated prices may continue in the months ahead before cooling off. He has continued the commitment to the US central bank’s bond-buying programme for the near term. This increased liquidity for the global financial markets should support emerging markets including India in the short to medium term.