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CPI inflation dips to 7.04% in May; 5 takeaways

The slight drop in retail inflation offers only a temporary relief, say economists

June 15, 2022 / 01:30 PM IST

India’s Consumer Price Index (CPI)-based inflation for the month of May 2022 came in at 7.04 percent. That’s down from April’s near-eight-year high of 7.79 percent, however, it is unlikely to fall below the Reserve Bank of India’s (RBI) upper comfort level target of 6 percent this financial year, according to economists.

Economists said that the decline in inflation during May was driven to a large extent by a favourable base. The moderation notwithstanding, considerable uncertainty surrounds inflation outlook amid geopolitical tensions and their attendant impact on energy and food prices.

“The shocks to food inflation are likely to set in motion second-round effects on headline inflation. While the supply-side policy measures such as restrictions on wheat exports by the government could alleviate some cost-push pressures, the potential shortfall in production due to the heat wave is likely an offsetting risk,” Delhi-based economist Shashank Mendiratta said.

Here are five highlights of the recent CPI inflation data as pointed out by economists:

1 Minimal impact of government measures


The government introduced several measures in May to cope with inflation, but economists said that these initiatives have been mostly futile. “Measures announced by the government consisting of excise duty cuts on petrol and diesel are likely to have had little impact on the May reading. The major impact will be seen in the June inflation print as the excise duty was announced only in the last week of May,” said Swati Arora, economist, HDFC bank.

Also read: India won’t bend on WTO global plan on food exports: Sources

2 Further rate hike 

According to economists, the RBI will continue to raise policy rates to close to 6 percent by the end of this fiscal year, frontloading its rate hikes. “Apart from this, a depreciating currency will also pose risks in terms of imported inflation. Thus, the RBI will be more hawkish and aggressive in its pace of rate hikes in the coming months,” said Dipanwita Mazumdar, economist, Bank of Baroda.

3 On the liquidity front

The monetary policy isn’t targeting a particular liquidity level. Instead, it is targeting the weighted average call rate, say economists. “As the policy stance remains accommodative (with the focus on withdrawing accommodation), the aim will be to get the call rate above the SDF. Given the substantial levels of durable liquidity, we can’t rule out another CRR hike, but it is only expected in H2FY23 once greater clarity is available on liquidity,” added Gaura Sengupta, economist, IDFC First.

Also read:  WPI inflation hits new high in May, rises to 15.88%

4 US Fed outcome

Economists pointed out that more aggressive hikes by the US Federal Reserve and higher terminal policy rate expectations would surely spill over into policy expectations from the RBI MPC as well.

“The Fed is expected to hike rates by 50 bps in its policy meeting. US CPI inflation rose unexpectedly to 8.6 percent vs. market expectations of 8.3 percent, dashing hopes that US inflation had peaked,” added Arora.

5 Best to avoid experimenting

According to several economists, to cope with the rising inflation, RBI should raise the repo rate and not undertake any other experiments.

“Generally, as a matter of strategy, it is best if the RBI and the Monetary Policy Committee (MPC) avoid any dovish hints or experiments in the current global backdrop and particularly amidst already high domestic inflation and deep negative real policy rates. A sharp depreciation in currencies such as the Japanese Yen (JPY) that, in turn, is led by the refusal of the Bank of Japan (BoJ) to give in to demands for policy normalisation is important to take note of,” added Abhishek Upadhyay, senior economist, ICICI Securities.
Pushpita Dey
first published: Jun 14, 2022 06:28 pm
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