Retail inflation for May matches estimates at 7.04%

India's headline retail inflation rate eased to 7.04 percent in May from April's near-eight-year high of 7.79 percent thanks to a favourable base effect, according to data released on June 13 by the Ministry of Statistics and Programme Implementation.

The latest inflation print is along with consensus estimates. As per a Moneycontrol poll, Consumer Price Index (CPI) inflation was seen falling to 7.1 percent in May.

The fall in inflation in May is unlikely to do much to slow down the Reserve Bank of India's (RBI) rate hike cycle.

CPI inflation has now been above the RBI's medium-term target of 4 percent for 32 consecutive months. More worryingly, it has now spent five months above the 6 percent upper bound of the 2-6 percent tolerance range. Given the central bank's latest forecast, the Monetary Policy Committee (MPC) is on track to fail to meet its mandate in October, when CPI data for September will be released.

The MPC is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. With inflation having averaged 6.3 percent in January-March, the RBI's forecast - if they hold - of 7.5 percent for April-June and 7.4 percent for July-September will see it fail by October.

May internals

Even though inflation dropped sharply by 75 basis points in May from April, all six major groups of the CPI basket - 'food and beverages', 'pan, tobacco, and intoxicants', 'clothing and footwear', 'housing', 'fuel and light', and 'miscellaneous' - registered a sequential increase in their indices.

While the index for food and beverages rose 1.5 percent month-on-month in May, that of fuel and light was up 1.4 percent from April.

Both the sequential price increases were as expected. Food prices - especially those of cereals, meat and fish, edible oils, and vegetables - rose in May due to the heat wave, shortages, and rising input costs.

Out of the 22 food items on which the Department of Consumer Affairs compiles data, only three saw a month-on-month fall in prices in May.

Meanwhile, the impact of the excise duty cut for petrol and diesel announced on May 21 is expected to be felt in the inflation data for June.

Inflation dropped in May despite these upward pressures on account of an extremely favourable base effect.

In May 2021, the general index of the CPI was 160.4—1.6 percent higher than the 157.8 seen in April 2021. This dwarfed the 0.9 percent rise posted by the index last month, helping pull down inflation sharply.

The base effect also dragged down core inflation - or inflation excluding food and fuel. In May, this measure of inflation - seen as an indicator of underlying demand in the economy - plummetted to 6.2 percent from 7.0 percent in April.

Future policy

The RBI has increased the repo rate by 90 basis points so far in FY23 to 4.90 percent. And economists see it continuing to increase the policy rate in the next couple of meetings, with the key rate seen around 5.5-6.0 percent by the end of the financial year.

The rate hikes are bound the impinge on growth, albeit with a lag, with the central bank retaining its GDP growth forecast for FY23 at 7.2 percent on June 8.