Retail inflation eased to 7.04% in May from a 95-month high of 7.79% in April, as price pressure across core and food products moderated, partly aided by a conducive base.
Inflation based on the consumer price index (CPI) still breached the upper band of the Reserve Bank of India’s medium-term target (2-6%) for a fifth straight month. The RBI is still widely expected to go for a third round of rate hike in August but the moderation in inflation substantially reduces the possibility of any out-of-cycle rate action in between.
However, the short-term outlook on inflation remains worrisome as weather shocks and high international commodity prices could jack up supply-side pressures.
Inflation is set to rise again from July once the favourable base-effect wanes.
The government has cut fuel taxes (the first monthly impact of the move will reflect in the June data) and initiated a raft of steps to ease supply bottlenecks, including import tax cuts on edible oils on top of the RBI’s repo rate hike of 90 basis points since May.
However, a further rise in global crude oil prices (Indian basket hit a 10-year high on June 9), coupled with the rupee depreciation, could stoke fresh price pressure. Moreover, once they go up, prices of products tend to exhibit some downward rigidity. In such a case, the indirect beneficial impact of the fuel tax cut on a broad range of goods and services could be less dramatic than assumed. Wholesale price inflation, too, had hit an over 30-year high of 15.08% in April, with potential to spill over to the retail level with a time lag.
Retail inflation is unlikely to spike in June (although a marginal rise can’t be ruled out) and may, thus, undershoot the RBI’s latest forecast of 7.5% for the first quarter, according to some analysts. The central bank last week raised its full-year (FY23) inflation forecast to 6.7% and predicted that it will exceed its tolerance level (6%) in the first three quarters.
Some economists see another two rounds of rate hikes – in August and October — by the RBI, albeit less aggressive, before a pause.
Core retail inflation moderated to 6.07% in May from a 95-month high of 6.96% in April, having exceeded the 5%-mark for 24 consecutive months, according to an India Ratings estimate.
Price pressure in food products, the dominant segment within the CPI with an almost 46% weight, too, eased from April’s 17-month peak of 8.31% to hit 7.97%. Fuel and light inflation, too, dropped to 9.54% in May from 10.8% in the previous month; but it was higher than the March level of 7.5%. The excise duty cuts on petrol and diesel also contributed to the easing of transport and communication inflation to 9.5% from 10.9% in April.
Food inflation exceeded the headline inflation for a third straight month in May. But price pressure in edible oils and fat, which are mostly imported, eased to 13.26% in May from 17.28% in the previous month. However, inflation in vegetables again exacerbated to 18.26% from 15.41% in April.
Icra chief economist Aditi Nayar said any drop in inflation from the RBI’s forecast of 7.5% for the June quarter will assuage “fears of sharp tightening in the August review”. “We maintain our view that the MPC will increase the policy rate by 35 bps and 25 bps, respectively, in the next two policy reviews, followed by a pause,” Nayar said.
Economists at India Ratings cautioned that the favourable base effect will start tapering off from June until November/December 2022 but the “impact of duty cuts, ban on wheat exports and normal monsoon may provide some comfort on the inflationary front”. They expected retail inflation to remain above 7% even in June.
Crisil chief economist DK Joshi said, “While normal monsoon is expected to augur well for kharif production, its intensity and distribution will be a monitorable. Further, international prices stay elevated for a wide range of agriculture, energy and industrial commodities, which will put a broad-based pressure on food, fuel and core inflation.” According to the latest monetary policy statement, considerable uncertainty surrounds the inflation trajectory due to global growth risks and geopolitical tensions. While the supply side measures taken by the government would help to alleviate some cost-push pressures, continuing shocks to food inflation could sustain pressures on headline inflation. Persisting inflationary pressures could set in motion second round effects on the headline CPI, it had said.