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Business News/ Opinion / Blogs/  Retail inflation drops sharply but drought may spoil the party
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Retail inflation drops sharply but drought may spoil the party

RBI is unlikely to be in a hurry to ease its monetary policy as it will keep a hawk's eye on the progress of monsoon which till now has been deficient

Most analysts had expected it to be around 5.8%. Although prices of food remain high—rising 8.1% from a year earlier and 1.2% in June over May—a decline in fuel inflation, to 9% in June from 10.5% in May, led to the easing of inflation. Photo: Hemant Mishra/MintPremium
Most analysts had expected it to be around 5.8%. Although prices of food remain high—rising 8.1% from a year earlier and 1.2% in June over May—a decline in fuel inflation, to 9% in June from 10.5% in May, led to the easing of inflation. Photo: Hemant Mishra/Mint

India’s consumer price inflation rose 7.31% in June, a 43-month low, and sharply lower than consensus market expectations of 7.95%. In May, it was 8.28%. Driven by a broad-based decline in food prices (food inflation eased to 7.9%), consumer inflation dropped to below 8% for the first time since January 2012, when the current retail inflation series started. In that month, it was 7.65%.

After a 4.7% gain in factory output in May, the fastest pace in 19 months, wholesale price-based inflation, or WPI, slowing to a four-month low of 5.43% and retail inflation at 7.31% in June should be music to the ears of finance minister Arun Jaitley, who expressed his resolve to fight inflation and change the investment climate in the Bharatiya Janata Party-led National Democratic Alliance government’s budget, presented last week.

However, the country’s central bank is unlikely to be in a hurry to ease its monetary policy soon for various reasons. Apart from the inflation and factory output figures, the Reserve Bank of India (RBI) will keep a hawk’s eye on the progress of the monsoon which till now has been deficient, with the spectre of drought looming large.

Most analysts had expected retail inflation at around 7.95% and WPI at 5.8%. Although prices of food remain high—rising 8.1% from a year earlier and 1.2% in June over May—a decline in fuel inflation, to 9% in June from 10.5% in May, led to the easing of WPI inflation. In May, WPI inflation had quickened to 6.01%, the fastest pace since January.

While the drop in wholesale inflation is something to cheer about, the not-so-good news is the upward revision of April inflation data—from 5.2% to 5.55%. The other factor that concerns analysts is the stubborn manufacturing inflation. The so-called core inflation, or the non-food, non-oil inflation, in June accelerated to 3.9%, marginally higher than 3.8% in the previous month. If one reads this data along with the factory output figure of May, one gets the feeling that demand pressure is slowly coming back to Asia’s third largest economy. The growth in May industrial output is supported by a cyclical recovery in both basic goods and capital goods as well as an improvement in consumer goods, driven by higher sales of automobiles, among other things.

However, core CPI inflation eased 7.4% in June. Housing inflation continued to fall—9.1% in June from an average of 10.2% over the previous 12 months—and fuel inflation dropped to 4.6% from the past year’s average of 6.9%.

RBI governor Raghuram Rajan should be happy with the latest consumer inflation figures, as in the Indian central bank’s scheme of things, consumer inflation is the all-important data to watch out for and WPI inflation doesn’t matter. The bedrock of Rajan’s monetary policy is formed by the report of a panel on monetary policy. RBI deputy governor Urjit Patel headed the panel. The panel has charted out a glide path for retail inflation—8% by January 2015 and 6% by January 2016. The panel has also called for inflation targeting to be the primary objective of monetary policy.

Since he took over as RBI governor in September, Rajan has raised the central bank’s key policy rate thrice before leaving it unchanged at 8% at the June policy meeting. The next policy review is due on 5 August. Rajan is unlikely to make any change in the rate in the August policy.

Jaitley does not seem to be too excited about the idea of inflation targeting by RBI but in his last week’s budget speech, he has emphasized putting in place “a modern monetary policy framework to meet the challenge of an increasingly complex economy." I am sure Jaitley will soon elaborate on his idea of a modern monetary policy framework.

Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.

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Published: 14 Jul 2014, 03:56 PM IST
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