Retail inflation records a 10 month low in August

retail inflation

Inflation has again gone down in August riding on low food inflation. The moderation in inflation complicates the matter for Monetary Policy Committee (MPC) which will meet in first week of October. Earlier it was expected MPC will go for a rate hike due to fall of rupee and rise in inflation in July. MPC has already raised rates by 25 basis points in last two consecutive meets to combat rising inflation. Another reason which will impact MPC decision is US federal bank’s decision on rate hikes. Monsoon is also good for this season therefore rural inflation is expected to grow due to good crops. All these considerations further complicate RBI’s decision on interest rates in first week of October.

(PC: Quint)

The data released by Central Statistics Organization (CSO) revealed that Consumer Price Inflation (CPI) fell below 4 percent for the first time in 2018. Retail inflation (CPI) was at 3.69 percent in August compared to 4.17 percent in July. The MPC have mandate to maintain inflation in {4(+-) 2)} range. MPC has estimated inflation to be around 4.6 percent in the second quarter (July-September) of this fiscal year. However, inflation was below estimation in July and August. So, it will be interesting to see whether MPC goes for a rate hike despite inflation moderation, just to protect rupee because this will be against the previous policy decision which opted inflation as core driver in interest rate decisions.

The driver behind fall in retail inflation was fall in prices of fruits, vegetables and pulses. “Consumer food inflation came in at 13 months low at 0.29 percent, this was primarily due to decline in deflation of fruits (declining from May 2018), deflation in vegetables (second consecutive month) and continued deflation (21 consecutive months) in pulses. Fuel and light inflation at 8.5 percent was highest in last 60 months,” said Devendra Kumar Pant, chief economist at India ratings and research. But it is not just food sector where inflation moderated, the retail prices growth in housing, clothing and footwear, household goods, transport and communication moderated too. “The moderation in the core inflation to 5.9 percent in August 2018 was broad-based, which is a positive sign,” said Aditi Nayar, principal economist at rating agency ICRA. The only segment in which retail inflation appreciated is ‘fuel and light’ which stood at stood at 8.47 percent in August up from 7.96 percent in July. The continued rise in global crude oil prices are expected to keep inflation in this sector high. However, despite all the noise made by opposition on rising petroleum price, overall inflation is actually going down. So, all that opposition and some sections of media is doing is to fool people and turn public opinion against the government. The opposition and media want to persuade the people in believing that Modi government has not been able control inflation despite the fact statistics suggest the opposite.

(PC: Quint)

The depreciation in value to rupee and rising crude oil prices may force RBI to raise rates for third consecutive time. But Index of Industrial Production (IIP) declined from 6.9 percent in June to 6.6 percent in July (latest data release). Inflation has also moderated and GDP growth is robust. These points are in favor of RBI keeping policy rates same. The decision will depend on MPC wisdom and changes which takes places before MPC meeting in first week of October.

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Amit Agrahari

Engineering grad but Humanities and social sciences are my forte. Avid reader of religious Scriptures (Especially Hindu), Lord Shiva devotee
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