CPI inflation eases only a tad to 6.69% in August

Retail inflation eased only marginally to 6.69% year-on-year (y-o-y) in August, against a revised 6.73% in July, as lockdown-related supply disruptions outweighed any purported Covid-induced demand compression in the economy. This has dashed hopes for another round of repo rate cut in the next meeting of the Reserve Bank of India’s monetary policy committee (MPC), analysts said.

Food inflation moderated to 9.05% in July from 9.27% in the previous month but core inflation hardened further to a three-month peak of 5.6%, according to an ICRA estimate, reflecting underlying price pressure in the economy. With this, retail inflation remains above the MPC’s tolerance band of 4 (+/-2)% for eight out of the past nine months, complicating the central bank’s task at a time when economic growth is sliding.

Wholesale price inflation, meanwhile, touched 0.16% in August, having entered the positive territory for the first time since March, as manufacturing inflation hardened even though price pressure in food eased.

As for retail inflation, the headline print for April and May was 7.22% and 6.27%, respectively, but the price pressure was mostly aided by dearer food articles. However, even core retail inflation has risen from about 4% in March to 5.6% in August.

The marginal moderation in inflation in food and housing segments was offset by worsening price pressure in pan, tobacco and intoxicants, fuel and light and miscellaneous items. Supply disruptions due to localised lockdowns and heavy monsoon downpours in certain regions prevented a deeper fall in food inflation. This was reflected in the fact that inflation in vegetables and protein-based food items remained in double digits.

ICRA principal economist Aditi Nayar said with the CPI inflation for August remaining sticky, and unlikely to recede meaningfully in September, a repo cut in the upcoming policy review “seems to be virtually ruled out.”

“Moreover, the CPI inflation is expected to print sub-4% only in December 2020-February 2021, based on which a continuation of the accommodative stance appears doubtful,” she added.

India Ratings principal economist Sunil Sinha said: “Base effect will have a favourable effect now onwards on CPI inflation till January 2021. Consumer food prices although declined sequentially, they remained high at 9.05%.”

After an MPC meeting in August, the RBI had said headline inflation could remain elevated in the September quarter but likely to ease in the second half of this fiscal, aided by favourable base effects.

The MPC believed that supply chain disruptions on account of Covid-19 persist, with implications for both food and non-food prices. “A more favourable food inflation outlook may emerge as the bumper rabi harvest eases prices of cereals, especially if open market sales and public distribution offtake are expanded on the back of significantly higher procurement. Nonetheless, upside risks to food prices remain.”

The abatement of price pressure in key vegetables is delayed and remains contingent upon normalisation of supplies, the MPC had felt. Protein-based food items could also emerge as a pressure point. Higher domestic taxes on petroleum products have resulted in elevated domestic pump prices and will impart broad-based cost-push pressures going forward.