India's headline retail inflation rate dropped for the fourth month in a row in May, falling to 4.25 percent from 4.70 percent in April, according to data released by the Ministry of Statistics and Programme Implementation on June 12.
At 4.25 percent, Consumer Price Index (CPI) inflation for May is the lowest in 25 months and is below consensus estimates of 4.4 percent.
Despite the huge 227-basis-point fall since January, CPI inflation remains above the Reserve Bank of India's (RBI) medium-term target of 4 percent for the 44th month in a row.
One basis point is one-hundredth of a percentage point.
Inflation internals
In May, it was again a favourable base effect which was the driving force behind inflation falling to its lowest since April 2021.
"The sharp decline in inflation in recent months is primarily attributable to the favourable base effect rather than a month-over-month loss of inflationary momentum," noted Sujan Hajra, chief economist at Anand Rathi Shares and Stock Brokers.
| MAY 2023 INFLATION | CHANGE IN INDEX, MAY 2023 VS APR 2023 | |
| CPI | 4.25% | 0.5% |
| Food | 2.91% | 0.7% |
| Cereals | 12.65% | -0.1% |
| Meat, fish | -1.29% | 2.3% |
| Oils, fats | -16.01% | -2.8% |
| Vegetables | -8.18% | 3.3% |
| Pulses | 6.56% | 1.2% |
| Fruits | 0.70% | -2.3% |
| Clothing, footwear | 6.64% | 0.3% |
| Housing | 4.84% | 0.2% |
| Fuel, light | 4.64% | 0.6% |
| Miscellaneous | 4.84% | 0.3% |
Prices did indeed rise on a month-on-month basis, with the general index of the CPI up 0.5 percent from April, while the Consumer Food Price Index was up 0.7 percent.
However, there were some positives within the food basket, as the index for edible oils, fruits, and cereals fell on a month-on-month basis by 2.8 percent, 2.3 percent, and 0.1 percent, respectively.
However, prices surged for some other food items: vegetables (3.3 percent), meat and fish (2.3 percent), and eggs (2.2 percent).
The month-on-month price momentum was weaker for other major groups of the CPI basket. While the index for housing rose by 0.2 percent in May from April, that for 'clothing and footwear' and 'miscellaneous' items was up 0.3 percent each.
Meanwhile, core inflation - or inflation excluding the volatile food and fuel items - declined again in May, falling to 5 percent from 5.2 percent in April.
Policy impact
The latest inflation reading of 4.25 percent comes days after the RBI's Monetary Policy Committee (MPC) decided, on June 8, to leave the repo rate unchanged at 6.5 percent for the second meeting in a row.
The MPC's June 8 statement also revealed that the RBI had cut its inflation forecast for 2023-24 by 10 basis points to 5.1 percent and by a massive 50 basis points to 4.6 percent for April-June.
Data released on June 12 means the average inflation for April-May is 4.5 percent. Inflation can rise to 4.9 percent in June - data for which will be released on July 12 - and still meet the RBI's latest forecast.
While the base effect has been strongly favourable so far and will continue for the first half of 2023-24, it had peaked in April and is now steadily fading. As such, the RBI expects average CPI inflation to rise to 5.4 percent in October-December.
With inflation facing upside risks from dairy prices, the possibility of sub-par and uneven monsoon, and the usual uncertainty around crude oil prices, the MPC reiterated on June 8 that it will take "further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target".
However, economists think the rate-setting panel will not add to its 250 basis points worth of rate hikes from 2022-23, although repo rate cuts may be some time away.
"The hawkish tone of the June policy document, with the Committee's focus on bringing down the CPI inflation to 4.0 percent along with the 5 percent-plus CPI inflation projections for the next three quarters, implies that a pivot to rate cuts is quite distant. As a result, ICRA expects an extended pause through 2023-24, and the stance to remain unchanged over the next couple of policy meetings," said Aditi Nayar, chief economist at ICRA.
The MPC is scheduled to next meet during August 8-10.
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