Retail inflation stays unchanged at 7.01% in June, RBI policy a quarter away from failure

Representative image

India's headline retail inflation rate, as measured by the Consumer Price Index (CPI), stayed largely unchanged at a high of 7.01 percent in June as against 7.04 percent in May.

The latest inflation print remained in line with the consensus estimates. As per a Moneycontrol poll, CPI inflation was seen at 7 percent in June.

At 7.01 percent, the June CPI inflation print takes average inflation for April-June to 7.3 percent, 20 basis points lower than the Reserve Bank of India's (RBI) forecast of 7.5 percent, according to data released on July 12 by the Ministry of Statistics and Programme Implementation. However, undershooting the forecast is of little significance at this stage, with the central bank on track to miss its mandate.

The RBI's Monetary Policy Committee is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. With inflation having already averaged 6.3 percent in January-March, the RBI is now only one quarter away from failure.

The RBI's latest forecast pegs average CPI inflation for July-September at 7.4 percent.

June internals

The lack of any significant change in the inflation rate in June was due to several forces cancelling each other out.

Food prices, overall, rose in June, with the Consumer Food Price Index rising 1.0 percent month-on-month. However, within the food basket, the movement was varied: cereals, vegetables, meat and fish, milk, and eggs all witnessed a sequential pick up in prices. Meanwhile, the price of edible oils, pulses, and fruits edged lower from May.

The impact of lower petrol and diesel prices is seen in the 'miscellaneous' group, which contains these two items.

Among the non-food, non-fuel items, the index for the 'clothing and footwear' group rose by 0.8 percent month-on-month, while that for 'miscellaneous' was unchanged and that for 'housing' declined by 0.4 percent. This helped bring down core inflation slightly to 6 percent in June from 6.1 percent in May.

On the whole, the general index of the CPI rose 0.5 percent in June when compared to May.

Policy implications

The latest inflation number is unlikely to have any effect on the RBI's rate hike plans, with June being the 33rd month in a row that CPI inflation has come in above the medium-term target of 4 percent.

The central bank's Monetary Policy Committee (MPC) is scheduled to next meet August 2-4. Having already raised the repo rate by 90 basis points to 4.9 percent over two meetings in May and June, economists see another interest rate hike in the first week of August, which could take - depending on the quantum of the rate hike - the policy rate above the pre-pandemic level of 5.15 percent.

An expected repo rate hike in early August could be followed by even more rate action in subsequent months, with economists seeing the key interest rate around 5.5-6 percent at the end of FY23.

"We continue to foresee front loaded rate hikes of 60 basis points spread over the next two policy reviews followed by an extended pause, as the MPC will focus on containing inflationary expectations without sacrificing growth," said Aditi Nayar, ICRA's chief economist.