A lot of the progress made in cooling interest rates post RBI’s rate hike pause in April 2023 could be undone, by what is clearly a transitory food inflation trend, said economists after the National Statistical Office (NSO) released the retail inflation data on Monday.
According to the latest data, India’s consumer-based price index (CPI), or retail inflation in July surged to 7.44% YoY from 4.87 per cent in June. This is the highest reading in 15 months, since May 2022 when inflation rate stood at 7.79 per cent.
The CPI based inflation breached the upper limit of the Reserve Bank of India’s (RBI) tolerance band of 2-6 per cent after staying within for four consecutive months.
A recent Reuters poll of 53 economists had estimated the consumer price index (CPI) inflation to rise up to 6.40 per cent on an annual basis on surging food prices. However, the latest figures have exceeded the expectations of economists and analysts.
“The most recent monetary policy was announced on the assumption that, while a spike in food inflation is possible, it is highly likely to be transitory. With the spike being significantly higher than expected, we are skeptical that inflation will return to its glide path anytime soon,” said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.
The silver lining could be relatively range-bound core inflation, she added.
CPI inflation came in higher than even our above consensus estimate, said Radhika Rao, Senior Economist, DBS Group Research while adding that the core inflation, however, continues to ease, slipping below 5% in July, suggesting that the ex-food price pressures are benign at this juncture.
The jump in near-term inflation prints align with the cautious comments from the RBI MPC, but they would remain vigilant about spillover risks into core readings and inflationary expectations.
“August print assumes importance in this mix, with a sharp upside there not only necessitating a sharp revision in the official 2QFY inflation estimate but also raising the risk of reciprocal tightening measures,” she added.
The bulk of the increases is being seen in perishables, like vegetables, which, given the surge in tomato prices, has produced the highest sequential monthly print on record. Non-perishables in the food basket are also seeing consistently higher prices, in particular cereals, pulses, and spices.
Until early august there were no signs of any sequential moderation in food prices, However, the Govt intervention has picked pace in cereals and even helped in improving onion and tomato availability, Madhavi Arora, Lead Economist, Emkay Global Financial Services pointed out.
“The ongoing food price shock has put material risk to the RBI’s and our near term and FY24 CPI forecast. While this could pressure the RBI amid their inflation management mandate, this may not change the RBI’s perspective on inflation on net,” she said.
Last week, the Reserve Bank of India (RBI) raised its inflation forecast for the current financial year to 5.4% from 5.1% earlier, citing pressures from food prices.
In the July-September quarter, it now sees inflation at 6.2%, significantly higher than the 5.2% earlier forecast.
Monetary policy makers may have to soothe market nerves
The average yield of the benchmark 10-year Government bond paper declined from 7.21% to 7.1% between April’23 to July’23. Monetary policy makers may have to soothe market nerves, till the next rate decision and limit any unexpected spike in benchmark yields, said Debopam Chaudhuri, Chief Economist at Piramal Group.
“It is unlikely that today’s inflation data will re-trigger a rate hike programme in India, as globally retail inflation is on the decline. Also, we need to be prepared for a systemic rise in volatility in food inflation owing to increasingly erratic climate patterns. Monetary policy needs to adjust to such shocks,” he added.
The current bout of inflation post Russia-Ukraine war has been characterised by higher rural inflation compared to urban inflation, especially in case of cereals and pulses.
Rural inflation stood at 7.63% while urban inflation stood at 7.20%, the data showed.
This trend remains unabated which is negative from a rural economic health perspective. It is important to support rural economic activity and stimulate consumer demand in these parts of the country, as India emerges from the COVID-19 setback, Chaudhuri pointed out.
WPI inflation expected at a subdued level with positive implications for retail inflation
The wholesale price index (WPI) continued in a deflationary zone for the fourth consecutive month in July, helped by lower metals, chemicals, textile, manufactured food, and mineral oils prices.
WPI inflation narrowed sharply to -1.36% last month from -4.12% in June. Wholesale inflation in primary articles shot up to a 116 month high of 7.57% last month with wholesale prices in food articles jumping up to 14.25%.
However, the pace of annualised decline in WPI slowed significantly compared with the previous two months, with the spike in food prices led by vegetables restricting the downside. Consequently, sequential momentum in WPI turned positive after two months.
“If the food prices continue to trend upward, the deflationary trend could end, and WPI inflation could turn marginally positive in the coming months. Additionally, the uptrend in global crude oil prices, global edible oil prices, and uneven monsoon distribution domestically pose an upside risk to the outlook,” said Rajani Sinha, Chief Economist, CareEdge Ratings.
Nevertheless, the ratings agency expects the WPI inflation for this fiscal at a subdued level (in the range of 1-2%) with positive implications for the retail inflation trajectory.
