Retail inflation eased to 5.91% in March, while food inflation declined to 8.76% on a fall in onion prices
Urban inflation could rise during the lockdown, followed by a correction in CPI inflation
NEW DELHI :
A sharp fall in vegetable prices has led India’s retail inflation to ease from 6.58% in February to a four-month low of 5.91% in March. However, supply shortages due to the 21-day lockdown could push up inflation in the short run, said analysts.
Food inflation declined from 10.81% in February to 8.76% in March because of falling onion prices, shows data released by the National Statistical Office (NSO) on Monday. This was reflected in vegetable inflation softening from 31.61% to 18.63% in the two-month period.
The number gives a false sense of improvement in inflation, given that the real impact of the lockdown will be felt in April as prices of food items have increased quite sharply, said Madan Sabnavis, chief economist at CARE Ratings. “With the lockdown and limited movement of goods because of the absence of labour, trucks, and activity in wholesale markets, there has been a sharp decline in supplies of foodgrain, horticulture, and sugar, which is reflected in high prices in the market. This can push food inflation towards the 10% mark," said Sabnavis.
“However, core inflation will trend downwards as service prices would not change and those products with maximum retail price would not witness a change in prices even with supplies declining."
Trucks are getting detained, workers needed for producing essential goods are not getting passes, and cold storages are not being allowed to function, home secretary Ajay Bhalla said in a letter to states on 12 April. Prime Minister Narendra Modi is scheduled to address the nation on Tuesday morning in which he is widely expected to extend the lockdown by at least two weeks with concession to certain industries to restart economic activity.
There is a strong likelihood of an uptick in urban retail inflation during the lockdown period, followed by a subsequent resumption of the correction in CPI (Consumer Price Index) inflation as the situation normalises, said Aditi Nayar, principal economist at Icra Ratings.
“Revenue considerations of central and state governments suggest that the fall in crude oil prices is unlikely to transmit to a reduction in retail prices of diesel and petrol in the near-term," she said.
In March, rural inflation at 6.09% stood higher than urban inflation at 5.66% while fuel inflation marginally rose to 6.59% from 6.36% in February.
However, an array of forward-looking indicators by the Reserve Bank of India (RBI), such as household inflation expectations survey and professional forecasters survey, points to a much softer inflation trajectory going ahead. Food prices may soften under the beneficial effects of the record foodgrain and horticulture production, at least till the onset of the usual summer uptick while, the fall in crude prices should work towards easing inflationary pressures, depending on the level of the pass-through to retail prices, RBI said in its monetary policy report. RBI is expected to focus on reviving the economy hit and may further cut policy rates to boost lending through financial institutions. “The expected plunge in economic activity in Q1 FY2021 would remain at the forefront of monetary policy setting in the immediate term, especially given the anticipated sharp fall in the CPI inflation in the second half of FY2021. Accordingly, a further out-of-cycle reduction in the repo rate can’t be ruled out," Nayar said.
The quality of retail inflation data could pose a challenge for policymakers. Restrictions on movement and closure of non-essential business establishments are hampering efforts of investigators who are trying to collect information.