Retail price inflation eases to 7.01% in June, short-term outlook mixed
Retail price inflation eased to 7.01% in June, from 7.04% the previous month and a 95-month high of 7.79% in April, as pricing pressure in the base and food slowed down.
Inflation based on the consumer price index (CPI) has consistently remained above the upper range of the central bank’s medium-term target (2-6%) for a sixth consecutive month. However, at 7.3%, retail price inflation in the June quarter remained below the central bank’s forecast (7.5%).
Although the Reserve Bank of India (RBI) is still expected to deliver a third round of rate hikes in August, the moderation in inflation for a second consecutive month has reduced the possibility of a off-cycle action on rates between the two.
As global commodity prices, particularly oil, have begun to decline, a continued pass-through of soaring input costs to product prices and resurgence in services activity could keep pressure on the economy. global inflation. Therefore, any further decline in retail price inflation could be only gradual and not abrupt, analysts said.
Wholesale price inflation also hit a more than 30-year high of 15.88% in May, indicating that the transmission is far from over.
Importantly, the first full-month impact of the government’s decision to reduce fuel taxes and ease supply bottlenecks for certain raw materials and intermediate goods such as steel has was captured in the June data. These supply-side measures came on top of the RBI’s repo rate hike of 90 basis points since May.
The Bloomberg Commodity Index has fallen more than 14% in the past month as investors remain concerned about a potential recession-related slowdown in demand. Brent crude oil futures fell 4.1% last week. On Tuesday, it fell 5.7% and reigned at $100.95 a barrel in intraday trading.
On Saturday, RBI Governor Shaktikanta Das said inflation would start to decline gradually from the second half of this fiscal year. Some economists still see two rounds of rate hikes – in August and October – by the central bank, albeit less aggressive, before a pause.
Core retail price inflation declined to 5.95% in June from 6.07% in May. With this, it has crossed the 5% mark for 25 consecutive months, according to an estimate by India Ratings.
Food inflation, which weighs nearly 46% in the CPI, fell to 7.75% in June from 7.97% the previous month.
Fuel and lighting inflation rose slightly to 10.39% from 9.54% in May. But cuts in excise duties on petrol and diesel appear to have helped ease transport and communications inflation to 6.90% in June from 9.5% the previous month.
Although food inflation exceeded headline inflation for a fourth consecutive month in June, price pressure on edible oils and fats, which are mainly imported, eased to 9.36% in June, against 13.26% in May and 17.28% in April. However, vegetable inflation remained high at 17.37%, although down from 18.26% in May.
CIFAR Chief Economist Aditi Nayar said with falling commodity prices and falling vegetable and edible oil prices, retail inflation is expected to drop below 7% in the coming months. “However, the sequential dynamics of services inflation remains a controllable key, as strong domestic demand is likely to create upward pressure on prices in this sector,” she said. Nayar expected anticipated rate hikes of 60 basis points more spread out over the next two policy revisions followed by an extended pause.
DK Srivastava, chief policy adviser at EY India, said there was not much relief for low-income consumer budgets with clothing and footwear inflation at higher levels of 9.2% and 11.9% respectively in June. He expected June’s WPI inflation to continue to outpace CPI inflation by a margin of around 8 percentage points, similar to May’s. “Linked to this, we expect nominal GDP growth in the first quarter to be significantly higher than real GDP growth, which would translate into buoyant tax revenues for the central and state governments, creating headroom. fiscal maneuver to further reduce excise duties and VAT rates on petroleum products and provide additional revenue support for fertilizer subsidies,” Srivastava said.
Economists at India Ratings said if commodity prices have moved away from their recent highs, rupee weakness could wipe out some of those gains. The base effect will also become unfavorable from July. They expected retail price inflation in July to be 20 to 30 basis points higher than in June.