India’s Retail Inflation Remains At Upper End Of MPC Tolerance Band In June

Retail inflation in India remained elevated in June despite a sharp plunge in economic activity, as the cost of some food articles and transportation remained high.

Consumer Price Index inflation stood at 6.09% in June 2020, according to data released by the Ministry of Statistics and Program Implementation on Monday. A Bloomberg poll of 34 economists had estimated inflation at 5.3% for June 2020.

At over 6%, inflation remains just above the Monetary Policy Committee’s tolerance band of 4 (+/-2)%.

In March, headline retail inflation stood at 5.91%. A nationwide lockdown imposed at the end of March had disrupted data collection, preventing a release of the headline CPI inflation number for April and May.

In its release on Monday, the statistical office released imputed index data for April and May using the methodology recommended in ‘Business Continuity Guidelines’, brought out by Inter-Secretariat Working Group on Price Statistics — a combined forum of ILO, EuroStat, OECD, UNECE, World Bank and IMF — in May, 2020.

Inflation Internals

A break-up of the inflation data showed that higher prices of food articles and of transportation contributed to the elevated inflation. Perishables like fruits and vegetables, however, showed sharply lower inflation. Core inflation categories also saw low inflation, reflecting weak demand conditions.

• Rural inflation stood at 6.2% in June 2020.
• Inflation in urban areas stood at 5.9% in June.
• Among key food categories, inflation in the ‘meats and fish’ segment was at 16.22%, ‘oils & fats’ at 12.27%, pulses at 16.68% and spices at 11.74%.
• Vegetable inflation stood at 1.86%, while inflation in the fruits category stood at -0.68%
• Clothing and footwear inflation was at 3.53%.
• Housing inflation stood at 3.55% in June.
• Fuel and light inflation stood at 2.69%.
• Transport and communication inflation stood at 7.14%
• Inflation in the personal care and effects category, which includes gold ornaments, stood at 12.43%.

Mixed Signals

The CPI data send mixed signals for monetary policy. Yet, given the sharp collapse in demand conditions, the MPC may continue to cut rates.

“The inflation print implies that retail inflation in June 2020 was higher than the level in March 2020, when the lockdown was first imposed, challenging the view that demand destruction would cool inflation despite the supply-side hiccups,” said Aditi Nayar, principal economist at ICRA.

The MPC may choose to frontload further rate cuts to support sentiment and hasten monetary policy transmission, Nayar said. ICRA expects a 25 basis point cut in the repo rate and a 35 basis point cut in the reverse repo rate at the next policy meeting.

Rahul Bajoria, chief India economist at Barclays, noted that even core inflation rose to 4.9% despite several sectors being in a state of lockdown. The increase in margins in areas such as transport and gold prices may be one reason for the increase in prices, Bajoria said.

“With CPI inflation showing a more elevated path of inflation than previously anticipated, we believe some MPC members may voice their concerns, and could lead to a tempering in enthusiasm for material front-loaded policy support from here on. We still think there is room for policy support, and expect another 50 basis points in rate cuts by Q3 2020,” Bajoria said.