According to the Ministry of Statistics & Programme Implementation (MoSPI) data released today showed that India’s retail inflation growth eased to 5.30% in August 2021. The retail inflation which is measured by the Consumer Price Index (CPI) for the month of July was 5.59%.
Ms Aditi Nayar, Chief Economist, ICRA Limited said, “the welcome decline in the CPI inflation in August 2021 was broad-based, led by all the components except clothing and footwear, and fuel and power. Contrary to our apprehension, the CPI inflation receded appreciably to 5.3% in August 2021, led by lower than expected food inflation.”
The cooling of food & beverages inflation was the chief driver behind the moderation in the CPI inflation to a 4-month low of 3.8% in August 2021. In month-on-month terms, the food & beverages basket remained flat, with downticks in eggs, meat and fish, fruits, pulses and cereals, absorbing the upticks in milk, oils and fats, vegetables, sugar and spices.
Late kharif sowing has helped to narrow the gap with last year’s acreage, with coarse cereals, oilseeds and cotton continuing to record a YoY decline. Despite the recent abundant rainfall, reservoir levels on September 9, 2021 were substantially lower than the corresponding level of 2020 and 2019. This suggests a cautious outlook for rabi sowing, unless rains remain strong in the rest of this month, which would be counterproductive for the kharif harvest. Availability of fertilisers has also emerged as a concern for the upcoming rabi season as systemic inventory is significantly below the historical levels.
The core-CPI inflation eased to 5.5% in August 2021 from 5.7% in the previous month, led by miscellaneous items, especially personal care and effects, as well as pan, tobacco and intoxicants. In particular, the month-on-month change for miscellaneous items eased sharply to 0.4% in August 2021 from the unnerving 0.9% in July 2021, easing fears regarding the inflation trajectory. At the same time, the inflation for clothing and footwear firmed up in August 2021, which may be a signal of a demand recovery.
The sequential downtick in the headline and the core August 2021 CPI print is likely to allay the discomfort in the tone of the upcoming policy review, as well as the subsequent minutes of the MPC members. Moreover, fears of immediate policy normalisation have been doused with the Q1 FY2022 GDP growth being mildly lower than the MPC’s own forecast of 21.4%.
The stance and policy rate are likely to be left unchanged until strengthening domestic demand replaces supply-side constraints as the key driver of inflationary pressures. The Q2 FY2022 GDP data (to be released end-Nov) and the festive season trends will provide a clearer signal of the strength of the demand revival, and guide the tone of the December 2021 policy review.
“At present, we believe policy normalisation could commence in February 2022, with a change in the stance of monetary policy to neutral from accommodative, followed by a hike in the repo rate of 25 bps each in the April 2022 and June 2022 meetings. Once the lift-off starts, we believe that the MPC will stagger rate increases over a period of time, instead of immediately trying to push real interest rates back into the positive territory,” ICRA said.
Suman Chowdhury, Chief Analytical Officer said “India’s CPI inflation eased to a 4-month low of 5.30% YoY in Aug-21 from 5.59% in Jul-21 thereby remaining well within RBI’s inflation target band for the second consecutive month. Importantly, the sequential momentum in the index has moderately significantly to 0.25 % MoM vis-à-vis 0.7% in the previous month primarily due to stagnant food prices. Further, within Food & Beverages, comfort was derived from a decline in prices of pulses and fruits and limited rise in vegetable prices on a MoM basis. The recent measures taken by the government on incentivizing supplies through customs duty cuts in the case of pulses and edible oils have played an important role in mitigating overall food price pressures in the past 2 months. On the other hand, core inflation has also provided some solace printing at 5.9% YoY and 0.4% MoM in Aug-21 respectively, led by significant easing in prices of personal goods and education.”
“Going forward, we expect headline inflation to moderate further on account of a favourable base-effect, easing of supply- side disruptions, plateauing of global commodity prices compared to Jun-21 peak and prospects of strong kharif output. However, pass through of higher input price pressures along with improvement in consumer sentiment supported by steady vaccination progress could fan some demand side price pressures thereby keeping core inflation sticky at elevated levels. Taking these factors into consideration we continue to expect FY22 CPI inflation at 5.5% with risks balanced on either side. We expect RBI to derive significant comfort from the moderating inflation print and reinforce its accommodative stance in the next MPC meet. However, the monetary landscape may change by end of Q3FY22 if there are strong signs of a demand pickup going forward. We expect an increase in reverse repo rate by Q4FY22 which will signal a transition from an accommodative to a neutral monetary policy.”
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( With inputs from indiainfoline)