CPI-based inflation above MPC comfort range for fourth straight month

 Consumer Price Index (CPI)-based inflation came in above the monetary policy committee’s target band of 4 per cent (with a margin of +/-2) for the fourth consecutive month in July.

The official data released on Thursday showed that retail inflation rose to 6.93 per cent year-on-year, up from 6.23 per cent in June, mainly because of a rise in food and petroleum prices.

Consumer Food Price Index-based inflation (CFPI) rose to 9.62 per cent in July, compared to 8.72 per cent in the previous month, the data by the National Statistical Office (NSO) showed.

Last week, the Reserve Bank of India’s (RBI’s) monetary policy committee kept key policy rates unchanged, deciding to use the future rate cuts “judiciously to maximise the beneficial effects”. The repo rate currently stands at 4 per cent, and the reverse repo rate at 3.35 per cent.

“Retail inflation has breached the RBI’s upper tolerance limit (6 per cent) for four consecutive months and seven out of eight months,” said Devendra Pant, chief economist with India Ratings.

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“The Covid-19 pandemic has cast its shadow over the retail price data collection, and data for states such as Manipur, Nagaland, and Puducherry has not been released as the price data was collected from less than 70 per cent markets,” said Pant.

Aditi Nayar, principal economist, ICRA, said, “As expected, soaring vegetable prices amid a heavy rainfall and localised lockdowns contributed to the spike in food inflation in July, which is expected to soften somewhat in the ongoing month.”

Prices of meat, fish, fruit, milk and milk products, and other food sub-groups rose in July. However, the most drastic increase in the index was seen for vegetables, which jumped to 178.4 compared with 156.5 a year earlier.

“Among the other categories, those for the miscellaneous group were high at 7 per cent. Personal care and transportation were the two elements that pushed up this number.

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Going ahead, the other components like health and education will also be under pressure. Recreation, too, will move up once the industry opens up,” said Madan Sabnavis, chief economist with CARE Ratings.

chartSabnavis partly echoed Nayar’s views and said food inflation would move downwards once kharif crops came after September.
Disruptions in economic activity and localised lockdowns affected free movement of goods, leading to an artificial increase in prices, he said, and added that the government’s policy of not reducing the prices of petrol and diesel kept the transport costs higher.

Sabnavis said the monetary policy committee’s decision to not cut rates in its last review was “appropriate”.

“The evolving trends for the ongoing month suggest that Consumer Price Index inflation may remain appreciably above 6 per cent in August 2020, which would be the last inflation print available before the next scheduled MPC review. Accordingly, the likelihood that the MPC would persist with a pause in its October 2020 meeting has climbed sharply, with a final rate cut likely to be deferred to the December 2020 or February,” Nayar said.