India’s Retail Inflation Eases to Four-Month Low of 5.3% in August

Retail inflation fell to a four-month low of 5.3% in August, down from 5.59% the previous month, thanks to lower food costs and a large base impact. According to statistics provided by the Ministry of Statistics and Programme Implementation, inflation based on the Consumer Price Index (CPI) stayed within the Reserve Bank of India’s (RBI) tolerance zone for the second month in a row.

Despite the fact that analysts expect inflation to decline further in the next months, they anticipate the RBI would maintain its accommodating monetary policy stance and only begin raising interest rates in the next fiscal year, given the risks to the economy.

Inflation in the food sector fell to 3.11% in August, down from 3.96% in July. Fuel inflation were high in August, rising to 12.98% from 12.38% the previous month. In August, the inflation rate for petrol rose to 24.01% from 23.70% in July, while the rate for diesel dropped to 22.06% from 22.71% in July.

Inflation in the core CPI, which excludes food and fuel, fell to 5.5% in August from 5.7% the previous month.

In its August meeting, the six-member monetary policy committee (MPC) increased the inflation forecast for the current fiscal year by 60 basis points (bps) to 5.7%. The MPC resolution also tasked the Union and state governments with lowering fuel and diesel costs through tax reductions.

As a result of the Covid-induced supply chain disruption, retail inflation surpassed the RBI’s goal of 2-6% in April. For the seventh month in a row, retail inflation has stayed over 5%, and for the 23rd month in a row, it has exceeded the Reserve Bank of India’s target rate of 4%.

The sequential downtick in the headline and core August CPI prints, according to Ms. Aditi Nayar, chief economist at ICRA, is likely to allay the discomfort in the tone of the impending policy review. “Furthermore, worries of fast policy normalisation have been doused, with GDP growth in Q1 FY2022 being somewhat lower than the MPC’s own projection of 21.4%. “Until stronger domestic demand replaces supply-side constraints as the primary source of inflationary pressures, the stance and policy rate are likely to remain unchanged,” said Ms. Nayar.

“At this time, we anticipate policy normalisation will begin in February 2022, with a shift in monetary policy from accommodating to neutral, followed by a 25-basis-point rise in the repo rate in each of the April and June 2022 meetings,” said Ms. Nayar.

Although monsoon rainfall was lower in August 2021, according to Mr. Sunil Kumar Sinha, senior economist at India Ratings and Research, it had little effect on food inflation. “Cereals, on the other hand, have seen deflation for the eighth month in a row. Low agricultural productivity and grain price deflation may have an influence on rural income and, as a result, rural demand. In fact, it is reflected in the low rate of wage increase in rural areas,” Mr. Sinha added.

Vegetable deflation increased to 11.68% in August, up from 7.75% in July and 0.70% in June. Deflation in cereals also occurred in August, but it slowed to 1.42% from 1.75% the previous month and 1.94% in June. At 0.62%, sugar and confectionery remained in the deflationary zone, up from 0.52% the previous month.

Other food basket products, on the other hand, witnessed a rapid increase in price. While the rate of inflation in eggs decreased from the previous month, it remained high at 16.33%.

Lower food inflation, driven by comfortable sowing activity despite subpar monsoons, and policymakers’ tax tweaks on edible oils and the imposition of stocking limits on pulses, according to Ms. Madhavi Arora, lead economist at Emkay Global Financial Services, will continue to reflect positively in the future for food inflation.

“The headline CPI is expected to be almost 60 basis points lower than the RBI’s projection of 5.7%. The RBI is unlikely to raise major policy rates this year, and the focus will be more on surplus liquidity management,” said Ms. Arora, citing the monetary response function’s present focus on growth recovery proving sustained.

In October-November 2021, according to Mr. Nikhil Gupta, chief economist of Motilal Oswal Financial Services, inflation would decline further to 4.2-4.3%. “A reduction in fuel taxes around Diwali (which we believe is a very likely scenario) may help to decrease inflation. As a result, we don’t expect the RBI to raise rates in FY22,” Mr. Gupta added.

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Source: IBEF

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