Retail inflation eases more than expected to 6.83% in August

Consumer Price Index inflation has now spent 47 consecutive months above the Reserve Bank of India's medium-term target of 4 percent.

India's headline retail inflation rate fell to 6.83 percent in August, data released by the Ministry of Statistics and Programme Implementation on September 12, as vegetable prices cooled somewhat compared to the previous month.

At 6.83 percent, the Consumer Price Index (CPI) inflation print for August is 61 basis points lower than July's 15-month high of 7.44 percent. However, it is the second month in a row that inflation has come in higher than the upper bound of the Reserve Bank of India's (RBI) tolerance limit of 2-6 percent. It is also the 47th month in a row that it has stayed above the central bank's medium-term target of 4 percent.

One basis point is one-hundredth of a percentage point.

While above mandated levels, the latest CPI inflation figure is below expectations, with economists having predicted prices likely rose 7.0 percent year-on-year in August.

Inflation internals

If a sharp rise in vegetable prices was responsible for July's shocking inflation print of 7.44 percent, a partial climbdown helped bring down the headline print in August.

Food inflation fell to 9.94 percent in August from 11.51 percent in July as the Consumer Food Price Index declined 0.7 percent month-on-month, suggesting falling price momentum. Within food, the price fall was led by vegetables, whose index was down 5.9 percent from July.

However, the dynamics were divergent when it comes to the three key vegetables: potato, onion, and tomato.

Sky-rocketing tomato prices, which caught the eye in July, were down 21.7 percent month-on-month in August as per the CPI data. Meanwhile, the price index for potato was up 2.3 percent from July while that of onion was 12.3 percent higher.

"Notwithstanding the reversal of the relatively transient spike in tomato prices, the outlook for food inflation remains on edge, on account of other vegetables like onions, as well as kharif crops with a year-on-year lag in sowing such as pulses. Well distributed rainfall in the rest of September could help to protect kharif yields, even as reservoir levels do not portend well for an early kick off of rabi sowing," Nayar warned.

While vegetable prices fell sequentially, cereals and pulses continued to push higher, posting month-on-month gains of 1.4 percent and 1.5 percent, respectively. Spices too kept rising, with their index up 3.2 percent from July.

Core inflation, meanwhile, declined again, edging down to 4.8 percent as against 4.9 percent in July.

Policy impact

While inflation fell more-than-expected in August, economists see the full impact of the ongoing vegetable price decline being felt in the September print, which will be released on October 12.

"The maximum impact of the decline in tomato prices will be felt in the September CPI print, which is tracking sub-6 percent," said Gaura Sen Gupta, India economist at IDFC First Bank.

"The cut in LPG prices will also aid moderation in September CPI inflation, reducing headline by 20-30 basis points," she added.

Even if inflation falls below 6 percent in September, it will in all likelihood exceed the RBI's forecast of 6.2 percent for July-September. In fact, for inflation to average 6.2 percent in July-September, it has to crash to at least 4.4 percent in September, which is highly improbable.

The RBI's Monetary Policy Committee (MPC), which has left the repo rate unchanged at 6.5 percent for three meetings in a row, is expected to do the same again when it meets in early October, according to  Dharmakirti Joshi, chief economist at CRISIL.

"Food inflation will remain a key monitorable for them because, if sustained, it can spill over to other components and steer the headline CPI inflation above the RBI's target. And this can constrain monetary policy as central banks do respond to inflation when it starts becoming generalised. We have already raised our inflation forecast to 5.5 percent for this fiscal from 5 percent earlier," Joshi said.