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India faces inflationary risks in coming moths

Growth in India’s factory activity slowed to a four-month low in February as new orders eased and weighed on output after manufacturers raised prices at the fastest pace in a year. This suggests retail inflation could continue to pick up over coming months, pressuring the Reserve Bank of India to raise interest rates despite concerns that tighter policy could weigh on economic growth.

Cost inflation accelerated to the sharpest since February 2017, adding to expectations that inflationary risks will continue over the coming months. While retail inflation eased in January from a 17-month high in the prior month, price rises are still above the RBI’s medium-term target of four per cent on rising energy costs and expectations for an increase in rural spending by the government.

The new orders sub-index, an indicator of domestic and export demand, fell to 52.3, its lowest since October. That is well below the long-run mean average of 57.1 for orders and marked the second consecutive month it has fallen. Export order growth, while pulling back slightly, was still solid.

While firms remain optimistic about future output, the world’s seventh-largest economy has not completely overcome the disruptions to demand from a ban of high-value currency notes in November 2016 and the implementation of GST.