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Retail inflation based on the Consumer Price Index (CPI) slipped to a four-month low of 5.30 per cent in August mainly as vegetables became cheaper. However, prices of edible oil are still on fire, as reflected in the inflation rate for ‘oil and fat’ at 33 per cent.
With the retail inflation trending down for the third month in succession after hitting a record high 6.30 per cent in May, pressure is expected to ease on the RBI Monetary Policy Committee. The committee is scheduled to meet in from October 6 to 8 and expected to hold its hand on the policy interest rate with an accommodative stance. It will also need to keep an eye on the volatility in crude oil prices.
Headline retail inflation rate was 5.59 per cent in July and 6.69 per cent in August last year.
Easing prices softened the headline inflation rate in August. Though some food items did record a rise, prices of others dipped, keeping the overall food inflation flat. Cheaper eggs, meat and fish, fruits, pulses and cereals made up for pricier milk, oils and fats, vegetables, sugar and spices.
According to Sunil Kumar Sinha, Principal Economist with India Ratings and Research, it is seventh consecutive month of retail inflation remaining above 5 per cent and 23rd month of holding above the RBI’s target inflation rate of 4 per cent.
Rural incomes, wages hit
Although the monsoon was desultory in August, it did not affect the cereals inflation. On the contrary, cereals saw seventh consecutive month of deflation. Low agriculture productivity and deflation in cereal prices may impact rural incomes and, in turn, hinterland demand. In fact, this is already getting reflected in lower rural wage growth, say economy watchers.
“Inflation is expected to fall at least till November due to the base effect, and move closer to the RBI’s targeted 4 per cent level in the third quarter of FY22. However, in the fourth quarter, it is expected to rise again.
Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services, said: “We continue to believe that inflation will ease towards 4.2-4.3 per cent in October-November. A cut in fuel taxes around Diwali (we consider it highly likely) may support lower inflation. Therefore, we don't expect the RBI to hike rates in FY22,” he said.
Industrial growth
In a sign of the industrial sector picking up, the Index of Industrial Production (IIP), released on Friday, grew 11.5 per cent in July. Besides the low base effect, manufacturing, mining and power sectors showed good performance. The IIP had contracted by 10.5 per cent in July 2020.
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