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While the going is great for now, caution is advised as the economy appears to be riding on a consumption boom which could quickly evaporate once the impact of higher oil and import prices sets in, aided by consumption-driven inflation.

Global Macro Eco | NA

Despite the falling rupee and rising oil prices, inflation as measured by the CPI, eased to a 10 month low of 3.69% for August 2018. While part of this low growth was on account of the high base effect, the spike in fuel and light inflation was well compensated for by the negligible rise in the prices of food and beverages and combined food price inflation, in general. However, the impact of rising oil prices, along with higher interest rates, is bound to have a secondary impact on food prices in the coming months.  

 

Other macro-indicators which suggest that the economy is currently in a sweet spot but could easily slip into a less optimistic place are the GDP and IIP growth figures. A closer look at the magnificent 8.2% GDP growth recorded for the June 2018 quarter reveals that it is significantly consumption driven, with investment demand still strong but declining. The robust IIP growth of 6.6% for July tells a similar story; in addition to the low base effect, it is buoyed by manufacturing (mainly consumer oriented industries such as auto, electronics, textiles, garments) and consumer durables and non-durables while capital goods (sometimes a proxy for future industrial growth) remained subdued.

 

So while the going is great for now, caution is advised as the economy appears to be riding on a consumption boom which could quickly evaporate once the impact of higher oil and import prices sets in, aided by consumption-driven inflation.

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