Retail inflation moderately falls to 6.69%, still above RBI’s comfort zones

Retail inflation for August has come down to 6.69 per cent. But it is still higher than the targeted rate of inflation. This meant that the key interest rate is likely to see another pause during next meeting of Monetary Policy Committee (MPC).

Targeted inflation rate is 4 per cent with two per cent swing any of the direction. MPC under the Chairmanship of RBI Governor takes a call on key interest rate or repo rate (the rate at which banks borrow from the RBI). It was put on pause during last meeting in August.

Retail inflation based on Consumer Price Index (CPI) dropped slightly from 6.73 per cent in July. However, inflation of meat & fish (16.5 per cent), pulses and products (14.44 per cent), oil & fats (12.45 per cent), spices (12.34 per cent), vegetable (11.41 per cent) and eggs (10.41 per cent) are still high. All these take the food inflation to 9.05 per cent, little less than 9.27 per cent of July. Now the expectation is that food inflation will come down.

Also read: Why inflation-targeting is seen as anti-growth

According to India Ratings & Research (Ind-Ra), the base effect will have a favourable impact now onwards on CPI inflation till January 2021. The agency also expects favourable monsoon and prospects of a good kharif and rabi crops to have a positive influence on food inflation.

“However, inflation of protein rich commodities such as pulses, egg, meat and fish etc. may remain firm due to people’s preference for these commodities to build immunity to fight Covid-19 pandemic,” Sunil Kumar Sinha, Principal Economist at Ind-Ra, said.

Retail inflation in last five months has been in excess of 6 per cent. Unless, retail inflation in September 2020 declines sharply to around 4.5 per cent, the retail inflation in three consecutive quarters will exceed 6 per cent and monetary policy committee will have to respond to the government on the steps taken to keep inflation in 2-6 per cent range.

“Despite 1QFY21 GDP growth plummeting to -23.9 per cent, Ind-Ra believes policy rates are unlikely to be cut in the forthcoming monetary policy,” Sinha said.

Also read: Allowing the rupee to strengthen can help contain the creeping inflation

Rajani Sinha, Chief Economist at Knight Frank India, said that CPI inflation in August has remained above RBI’s comfort zone. The concern is that sustained high inflation over the last few months will result in inflationary expectations inching up. This in turn will put further upward pressure on actual inflation. The high inflation currently is mainly because of supply-side factors, while demand side inflation remains subdued because of economic uncertainties. “Going forward, as the economy unlocks and supply-side bottlenecks ease, CPI inflation should come under control. As inflationary pressure eases in the next few months, the RBI is likely to cut policy interest rate further,” she said.

Wholesale Inflation

Wholesale inflation based on changes in Wholesale Price Index (WPI) registered 0.16 per cent as against deflation of 0.58 per cent in July. Though it is still benign, it is inching up since June and after remaining in deflationary mode for four consecutive months, it finally entered the inflationary mode in August. The key drivers of whole sale inflation for August are food articles (pulses, vegetables, chicken, meat, tea etc), manufactured food products (edible oil, milk products, bakery products, processed condiments etc) and jewellery and related articles.