June CPI at 6.26%: Higher inflation adds to MPC’s woes, but growth focus will continue, say economists

Failure to end the pandemic was cited as a worry by 79% of respondents, with 71% flagging government debt levels.

The June print of consumer price index (CPI) based inflation has come at 6.26 percent, a tad lower than what most economists projected but continues to be above the upper tolerance band of the monetary policy committee (MPC) for the second consecutive month. In May, the CPI had come at 6.3 percent.

What is keeping the price pressure high?

Certainly, food remains the villain in the inflation story. Food inflation (CFPI) came in at 5.15 percent in June, compared with 5.01 percent in May. “Overall inflation will critically depend on how food inflation plays out this year. So far, food inflation trends have been on expected lines particularly for cereals,” said D K Joshi, chief economist at Crisil rating.

However, despite the higher inflation, the focus of the MPC will likely be on the growth revival and the accommodative stance will continue, said Joshi.

The RBI had revised the inflation forecasts for FY22 to 5.1 percent during 2021-22 in the June policy. But the general consensus among economists is that inflation may average above that level in FY22. India's largest rating agency, CRISIL has forecast 5.3 percent inflation in the fiscal year, 2022.

The next monetary policy meeting is scheduled for August 4-6.

According to Aditi Nayar, Chief Economist, ICRA Limited, following today's CPI inflation print, the inflation forecasts is likely to be revised upwards in the next MPC review, amid a status quo in the rates and stance, albeit with an underlying tone of uneasiness in the commentary.

“In our view, the tussle between supporting the nascent, incomplete revival in growth and preserving the anchoring of inflationary expectations will continue. The individual MPC members may have a varying tolerance for inflation that persists above the 6 percent target beyond a quarter, during the revival phase,” Nayar said.

If the CPI inflation remains entrenched above the 6 percent upper threshold in the next two prints (July-August 2021), a preponement of rate normalisation can't be ruled out, said Nayar.

The RBI has cut the key lending rate, repo, by 250 basis points (bps) since February 2019. It has retained the repo rate, at which it lends short-term funds to banks, at 4 percent in the last six consecutive monetary policies. The GDP growth, which showed improvement post the first wave, is yet again facing challenges due to the second wave.

Madan Sabnavis, chief economist of CARE rating, said inflation is likely to remain high. “It will remain high for sure as we are doing nothing on it. The government is not willing (to act) and the RBI is targeting growth,” said Sabnavis.

But, Madhavai Aroa, Lead Economist, Emkay Global Financial Services, said the June print is a positive surprise and should augur well for the inflation estimates ahead, and could also push the inflation average for the year near the RBI’s average if the momentum remains tamed.

“We remain watchful of pass-through of impending cost-push pressures in core goods inflation, while re-opening-led demand revival in select contact-sensitive household services could pressure core services inflation ahead,” Arora said.

However, MPC may still choose to look through the spike in inflation in the near term, with the monetary reaction function currently hinging more on growth revival becoming sustainable, Arora said.

In the last policy minutes, RBI Governor Shaktikanta Das had said that the MPC would need to keep a close watch on the evolving trajectory considering the uncertainties, both on the upside and downside, to the baseline path. “Given the predominant role of supply-side factors in the recent inflation movements, active and timely supply-side policy measures with regard to petrol and diesel, edible oil and pulses, among others, would be critical to bring about a durable softening of price pressures,” Das said.