Shrugging off the depressive effect of demonetisation, India's Consumer Price Index (CPI), or retail inflation, during March rose month-on-month at 3.81 per cent, even as factory output in the country contracted by (-)1.2 per cent in February, official data showed on Wednesday.
The CPI inflation rate in February was at 3.65 per cent. Year-on-Year, however, the inflation rate fell as compared to 4.83 per cent recorded in March 2016.
Consumer food price inflation moderated to 1.93 per cent, as compared to 2.01 per cent in February.
The factory output, as per the Index of Industrial Production (IIP), decelerated by (-)1.2 per cent during February from a rise of 3.2 per cent reported for January 2017.
The factory output had expanded by 1.9 per cent in the corresponding month of the previous year.
As per the IIP data released by the Central Statistics Office (CSO), the contraction was mainly on account of a 2 per cent decline in manufacturing output, which has the maximum weight in the overall index.
The CSO data also revealed that the annual retail inflation for rural India was 3.75 per cent while that for the urban centres was 3.88 per cent. The annual food inflation was 1.85 per cent in rural areas and 2.27 per cent in the urban areas.
The government target is four per cent plus-or-minus two percentage points for the next five years.
Earlier this month, with inflationary concerns in mind, the Reserve Bank of India (RBI) retained its key lending rate unchanged at 6.25 per cent, saying it awaited further macroeconomic data before deciding on any changes.
The RBI said risks are evenly balanced around the inflation trajectory at the current juncture. "There are upside risks to the baseline projection," the RBI policy statement said.
"Inflation developments have to be closely and continuously monitored, with food price pressures kept in check so that inflation expectations can be re-anchored. At the same time, the output gap is gradually closing. Consequently, aggregate demand pressures could build up, with implications for the inflation trajectory," it added.
At its last policy review on February 8, 2017, while holding rates at 6.25 per cent, the RBI had changed its policy stance from "accommodative" to "neutral" leaving it free to move either way with rates.
Expectations that the RBI will maintain status quo on rates had been fuelled by inflation numbers, with wholesale inflation soaring to over a three-year high of 6.55 per cent in February and retail inflation climbing to 3.65 per cent due to rise in food and fuel prices.
In March, the prices of milk and milk-based products surged by 4.69 per cent. Other protein-based food items such as meat and fish became dearer by 2.96 per cent.
Edible oils and fats prices increased by 3.76 per cent, whereas those for sugar and confectionery rose a whopping 17.05 per cent on a YoY basis.
The cost of cereals and its products appreciated by 5.38 per cent and prices of fruits were up by 9.35 per cent.
Commenting on the IIP numbers, industry chamber Ficci President Pankaj Patel said in a statement: "The fall in the manufacturing sector growth is in line with the outlook for the sector as perceived by FICCI's latest manufacturing survey for the fourth quarter.
"CPI inflation increased to 5-month high of 3.81 per cent in March 2017, compared to 3.65 per cent in February 2017. Our internal estimate suggests that CPI inflation is unlikely to breach the 4 per cent mark till July 2017," said State Bank of India's Chief Economic Adviser Soumya Kanti Ghosh.
"The IIP data clearly shows the fragile nature of industrial and manufacturing growth which has been languishing consecutively for several years now," said Sunil Kumar Sinha, Principal Economist, India Ratings and Research.
"Given the way inflation has panned out in recent few months and if it follows the trajectory RBI has sketched in its first bi-monthly monetary policy statement of FY18, then we are in for a long pause on policy rates, and in case monsoon behaves abnormally then even a reversal in rate cycle," he added.