Retail inflation saw a downward trend for the third straight month. Subdued prices of food items like vegetables pulled down the inflation to 5.3 per cent in August, within the RBI’s comfort zone.
While the Consumer Price Index (CPI)-based retail inflation declined to 5.3 per cent in August from 6.69 per cent in August 2020, food inflation dipped at a much faster pace to 3.11 per cent from 3.96 per cent in July. It was 9.05 per cent in August 2020.
Retail inflation, which rose sharply to 6.3 per cent in May, from 4.23 per cent in April, has been on a downward trajectory since then. It was 6.26 per cent in June and 5.59 percent in July this year.
The RBI, which mainly takes retail inflation into account to decide the monetary policy every two months, has been tasked by the government to keep it at four per cent, with a tolerance band of two per cent on either side.
As per the data released by the National Statistical Office (NSO) on Monday, inflation in vegetables and cereals contracted by 11.68 per cent and 1.42 percent, respectively.
However, the rate of price rise was 33 per cent in the oils and fats segment in August 2021, over the same month in 2020.
In order to control rising edible oil prices during the festival season, the government recently slashed the base custom duties on palm, soyabean, and sunflower oils. According to industry sources, this move could bring down retail prices by four to five rupees per litre.
Fuel and light continued to be pocket heavy for consumers with an inflation print of 12.95 per cent last month.
Economist and senior vice-president of DBS Singapore Radhika Rao said inflation decelerated on the back of favourable base effects and moderate food price pressures, as most sub-segments trended down, barring oil and fats.
Rao also said that the inflation tailwind would allow RBI to remain accommodative at the October policy review, with a bigger focus on liquidity management via absorption measures.
“On sequential basis, pipeline forces remain under watch, particularly due to the domestic fuel tax rigidity, service reopening gains, and passthrough of higher costs on account of supply bottlenecks alongside firm input prices,” Rao said.
The RBI had kept the key interest rate unchanged in its monetary policy review in August.
Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, expects the subsequent readings to remain fairly benign and much lower than RBI estimates. “The softer inflation would provide relief to the policymakers and more room to move much slower in terms of policy normalization,” she added.
The RBI has projected the CPI inflation at 5.7 per cent during 2021-22, 5.9 per cent in the second quarter, 5.3 per cent in third, and 5.8 per cent in the fourth quarter of the fiscal, with risks broadly balanced. CPI inflation for Q1 2022-23 is projected at 5.1 per cent.
ICRA expects policy normalisation to commence from February next year, with a change in the stance of monetary policy to neutral from accommodative. It can be followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 meetings.
“Once the lift-off starts, we believe that the MPC will stagger rate increases over a period of time,” said Chief Economist of ICRA Aditi Nayar.
The surge in the vegetable prices in the initial months of lockdown last year was the reason behind the higher levels of food inflation. Now, as most of the states have reopened post the second lockdown, the vegetable prices in the country have come down now, as a result of which the retail inflation has also eased.
(With inputs from Agencies)