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Sustained drop in prices of vegetables and fruits as also cereals brought the headline inflation in July below the psychological level of 6 per cent. There was also good news on the industrial growth rate, which remained in double digits though primarily on account of the base effect.
Retail inflation based on the Consumer Price Index (CPI) slipped to 5.39 per cent in July from 6.26 in June. Though even this is still above the median targeted inflation rate of 4 per cent, it is lower than the ceiling of 6 per cent. This could mean pressure easing on the RBI’s Monetary Policy Committee, too.
National Statistical Office (NSO) data showed that the retail inflation rate for vegetables dropped further to (-) 7.75 per cent in July from (-) 0.7 per cent in June. For cereals, it improved from (-) 1.9 per cent to (-) 1.7 per cent. Though inflation for edible oil is still high at 32.5, it is down from 34.7.
DK Srivastava, Chief Policy Advisor with EY, said “Structural factors such as higher supply by OPEC will have an impact on overall inflation. Signals from the government will also be critical,” he said while estimating the retail inflation at 5.5-5.6 per cent the next 2-3 months. He sees a change in RBI’s policy stance to ‘Neutral’ in February.
A report by QuantEco team of Shubhada Rao, Vivek Kumar and Yuvika Singhal said the threshold for tolerating inflation above the RBI’s target in FY22 may remain strong amidst still truant broad-based and durable growth impulses in the economy. From a Monetary Policy perspective, this will mean a backloaded normalisation in FY22... on the expectation of a pickup in vaccination coverage close to 60 per cent of the population with a single dose by year end, which could mean not just growth rebound but also demand-led price pressures getting activated in the economy.
“In line, we expect the RBI’s accommodative stance to switch to neutral in Dec-21... we expect reverse repo rate to be hiked from 3.35 per cent currently to 3.75 per cent in Dec-Feb FY22. This is likely to be followed by a 25 bps hike in the repo rate in April,” the report said.
IIP seen improving
The Index of Industrial Production (IIP) registered 13.6 per cent growth in June as against 28.6 per cent in May. Experts are not excited by the number but hoped things will improve. Devendra Kumar Pant, Chief Economist with India Ratings & Research, noted encouraging signs have emerged on the export front with global trade showing momentum.
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