India’s Retail Inflation Exceeds MPC Target For Fourth Month In A Row
Shoppers wear protective masks while buying vegetables from a street stall in Mumbai, India, on Tuesday, July 14, 2020. Photographer: Dhiraj Singh/Bloomberg

India’s Retail Inflation Exceeds MPC Target For Fourth Month In A Row

India’s retail inflation rose for the fourth straight month in July as costs of some food articles and transportation remained high.

Consumer Price Index inflation stood at 6.93% in July, compared to a revised estimate of 6.23% in June 2020, according to data released by the Ministry of Statistics and Program Implementation on Thursday. A Bloomberg poll of 35 economists had estimated inflation at 6.27% for July 2020. Inflation in food and beverages rose to 8.71% in July.

Core inflation increased to a 21-month high of 5.87%, according to data from India Ratings & Research.

At over 6%, inflation continued to remain just above the Monetary Policy Committee’s tolerance band of 4 (+/-2)%, for the fourth straight month since April, creating a stagflation like scenario where inflation is high despite a collapse in growth. The MPC which met earlier this month had left rates unchanged as they sought greater clarity on inflation, which they see easing in the second half of the year. The committee has not released revised inflation forecasts since the outbreak of the Covid crisis.

Inflation Internals

The break-up of the July CPI data suggests that inflation in the vegetables and pulses categories was elevated. Transportation and communication, too, saw high levels of inflation.

  • Rural inflation stood at 7.04% in July compared 6.3% in June.
  • Inflation in urban areas stood at 6.84% compared to 6.1% in June.
  • Among key food categories, vegetable inflation stood at 11.29%, from 4% in June, while inflation in the fruits category stood at 0.13% from 0.3% in June. Pulses prices rose by 15.92% in July, compared to 17.6% in the previous month.
  • Clothing and footwear inflation was at 2.91% in July from 2.7% last month.
  • Housing inflation stood at 3.25% in July compared to 3.5% in June.
  • Fuel and light inflation rose to 2.8% in July from 0.5% in the previous month
  • Inflation in transport and communication rose to 9.95% in July from 8.3% in June.

Aditi Nayar, principal economist at ICRA said that the rise in CPI inflation was sharper-than-anticipated, led by core items that are still adjusting to the new demand-supply dynamics. The increase in food inflation was along expected lines, Nayar said.

Devendra Pant, chief economist at India Ratings pointed out that base effect played a role in the higher inflation in July. Beyond that, data collection issues also persisted as inflation data for a few states was not included due to inadequate responses. Still, the increase in core inflation is perplexing, Pant said.

Inflation increase of some of these commodities at a time of depressed demand is perplexing, which suggests the inflation increase is mainly due to supply disruption not due to demand pressure.
Devendra Pant, Chief Economist, India Ratings & Research

Nayar said that inflation may remain above 6% in August 2020, which would be the last datapoint available before the next scheduled MPC review. “Accordingly, the likelihood that the MPC would persist with a pause in its October 2020 meeting has climbed sharply, with a final rate cut likely to be deferred to the December 2020 or February 2021 meeting,” she said.

According to Pant, both industrial production and inflation trends suggest different monetary policy action. “Retail inflation breaching MPC’s upper band of 6% in seven out of last eight months makes task of MPC difficult. India Ratings believes MPC will watch inflation trajectory very carefully before taking decision on further rate cuts,” Pant said.

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