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Retail inflation at 9-month low; rate hike seems unlikely

Our Bureau New Delhi | Updated on August 13, 2018 Published on August 13, 2018

The rate of retail inflation, better known as Consumer Price Index (CPI), has come down to 4.17 per cent in July, marking a nine-month low. With this decline, and a higher industrial production growth rate in June, the chance of another policy rate hike in October has faded.

Government data released on Monday revealed that the rates of inflation for vegetables were negative (-2.19 per cent) along with pulses (-8.91 per cent) and sugar and confectionery (-5.81 per cent). Though fruits had a positive rate of inflation (6.98 per cent), it was below expectation.

The lower inflation has surprise many, considering the heavy rains. However, experts believe this happened because of a base effect.

Aditi Nayar, Principal Economist at ICRA, said surprises from fruits, vegetables, clothing and footwear, and pan, tobacco and intoxicants contributed to a substantial correction in the headline CPI inflation. “Despite the truckers’ strike, food inflation eased considerably in July 2018, benefiting from the base effect,” she said.

Echoing similar sentiments, B Prasanna, Group Executive & Head (Global Markets Group) at ICICI Bank, said: “Food inflation surprised positively, mostly aided by lower than expected sequential momentum in cereals and pulses even as vegetable prices saw an expected uptick.”

Devendra Pant, Chief Economist at India Ratings, said that internally, food inflation moderated to a 10-month low. He expects it to retain this pace for another two months before a revision of kharif MSP starts impacting inflation. High YoY fuel price increases have led to continuous increase in inflation of the fuel and light, and the transport and communication groups. “Going forward these commodity groups are expected to exert pressure on retail inflation,” he said.

Monsoon deficit

Experts believe that even amid a 10 per cent monsoon deficit, kharif (mainly paddy) sowing has picked up, narrowing the gap to just 1.5 per cent relative to the area covered last year. Nevertheless, the area covered under rice, coarse cereals, pulses and cotton continues to lag year-ago levels. How the rest of the monsoon season goes will be vital for sowing and yields, and eventually impact retail inflation.

Now the big question is what will be happen when the Monetary Policy Committee (MPC) meets in October.

ICRA’s Nayar said CPI inflation in Q2 FY19 looks set to lag the MPC’s estimate of 4.6 per cent, reducing the likelihood of a rate hike in the October policy review. Agreeing, IndRa’s Pant said a sharp decline in retail inflation closer to the RBI’s 4 per cent inflation target will give much comfort to monetary authorities. “We expect the RBI to stay in pause mode in the rest of FY19,” he said.

According to Prasanna, with FY19 headline CPI inflation to average 4.7-4.8 per cent and core inflation averaging 5.8 per cent, chances of impending rate hikes, though, have come down, but the hike cycle is not over yet. “The deteriorating external situation could be a big factor that influences the MPC even as they closely watch the inflation trajectory going forward,” he said.

Published on August 13, 2018
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