At 6.09% in June, inflation breaches RBI threshold, MPC may yet stay put on rate cut path

By: |
Published: July 14, 2020 12:40 AM

Of course, transportation services (thanks to recent duty hikes on fuel) and certain food articles were among the major drivers of the June inflation.

Also, the latest data showed while overall food inflation has moderated, core inflation has risen from about 4% in March to 5.1% in June, according to an Icra estimate. Also, the latest data showed while overall food inflation has moderated, core inflation has risen from about 4% in March to 5.1% in June, according to an Icra estimate.

Covid-induced demand compression hasn’t cooled inflation, aggregate retail inflation data put out by the government for the first time since lockdown, showed on Monday.

Retail inflation hit higher-than-expected 6.09% in June, marking a rise from the pre-lockdown level of 5.91% in March. While the headline data for April and May, released only on Monday, suggested even higher inflation rates of 7.22% and 6.27%, respectively, the price pressure was mostly aided by dearer food articles.

Also, the latest data showed while overall food inflation has moderated, core inflation has risen from about 4% in March to 5.1% in June, according to an Icra estimate. This, as Icra principal economist Aditi Nayar points out, challenges the notion that “demand destruction would cool inflation despite the supply-side hiccups”.

However, at 6.09%, retail inflation remains above the Monetary Policy Committee’s tolerance band of 4 (+/-2)%. Nevertheless, given the expected GDP contraction, the MPC may still opt for another round of repo rate cut soon, as early as in July, some analysts said.

Of course, transportation services (thanks to recent duty hikes on fuel) and certain food articles were among the major drivers of the June inflation.

“In our view, the MPC will choose to frontload its assessment of the space for further rate cuts, in a bid to support sentiment and hasten transmission amid the substantial surplus in systemic liquidity, although the decision is unlikely to be unanimous. We expect an asymmetric cut of 25 bps in the repo rate and 35 bps in the reverse repo rate in the next policy meeting,” Nayar said.

Since a nationwide lockdown imposed on March 25 had disrupted data collection, the government had refrained from releasing the headline CPI inflation number for April and May earlier. However, the statistical office has now released imputed index data for April and May using the methodology recommended in ‘Business Continuity Guidelines’, brought out by Inter-Secretariat Working Group on Price Statistics — a combined forum of ILO, EuroStat, OECD, UNECE, World Bank and IMF — in May, 2020, according to an official statement.

At 6.2%, rural inflation remained higher than urban inflation, which stood at 5.9%. Transport and communication inflation stood at 7.14% Inflation in the personal care and effects category, which includes gold ornaments, touched 12.43%.

After an MPC meeting in late May, the RBI had conceded that the inflation outlook looked highly uncertain but added that headline inflation could remain below the target in Q3 and Q4. “As supply lines get restored in the coming months with gradual relaxations in the lockdown, the unusual spike in food inflation in April is expected to moderate. The forecast of a normal monsoon also portends well for food inflation,” it said.

Given the current global demand-supply balance, international crude oil prices are likely to remain low although they may firm up from the recent depressed levels. Soft global prices of metals and other industrial raw materials are likely to keep input costs low for domestic firms. Deficient demand may hold down pressures on core inflation (excluding food and fuel), although persisting supply dislocations impart uncertainty to the near term outlook. However, volatility in financial markets could have a bearing on inflation.

Do you know What is Cash Reserve Ratio (CRR), Finance Bill, Fiscal Policy in India, Expenditure Budget, Customs Duty? FE Knowledge Desk explains each of these and more in detail at Financial Express Explained. Also get Live BSE/NSE Stock Prices, latest NAV of Mutual Funds, Best equity funds, Top Gainers, Top Losers on Financial Express. Don’t forget to try our free Income Tax Calculator tool.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Robust online dispute resolution can facilitate affordable justice delivery, ease of doing business: Amitabh Kant
2Gadkari exhorts industry to identify sectors to boost exports, make India ‘self-reliant’
3UP revenue collection improves in July due to financial discipline, says FM Suresh Khanna