Retail inflation slows to 6.83% as vegetable prices decline

Retail inflation moderated to 6.83% in August from a 15-month high of 7.44% in July due to easing vegetable prices, offering a measure of relief to the Indian central bank and bond investors.

Consumer Price Index (CPI)-based inflation, however, continued to exceed the Reserve Bank of India’s (RBI’s) target range of 2-6%. A Mint poll of 18 economists estimated retail inflation to slow to 7% in August.

Food inflation, measured by the Consumer Food Price Index, which accounts for nearly half of the overall consumer price basket, slowed to 9.94% in August from 11.51% in July, according to data released by the ministry of statistics and programme implementation (MoSPI) on Tuesday.

The cooling of inflation was led by vegetables amid some moderation in prices of clothing and footwear, housing and miscellaneous items.

“Within food items, inflation in vegetables fell to 26.1% in August 2023 from 37.4% in the previous month, contributing as much as 28 basis points (bps) of the 61bps decline in the headline CPI inflation print between these months. Notably, the year-on-year (y-o-y) inflation prints in seven of the 12 food segments in the food and beverages index witnessed an uptick in their y-o-y print in August,” said Aditi Nayar, chief economist at Icra Ltd.

One bps is one hundredth of one percentage point.

However, economists are closely monitoring the prices of cereals, pulses and oil.

“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 y-o-y 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 added.

Core inflation at 4.8% remained in line with the market’s expectations.

“Bond markets might take a bit of relief and see slight downward movement in yields in the near term. The persistence of inflation and trajectory will determine the larger move,” said Akhil Mittal, senior fund manager of fixed income at Tata Asset Management. “So, we expect yields to remain range-bound and take a slight breather from the slow hardening that we have seen in recent times. We expect the 10-year benchmark G-Sec to trade in a range of 7.10%-7.25% in the near term,” he added.

Last month, RBI left the repo rate unchanged at 6.50% after terming the recent spike in vegetable prices to be a demand-supply mismatch.

The inflation data was collected from selected 1,114 urban markets and 1,181 villages covering all states/Union territories, MosPI said in a statement.

“During the month of August, NSO (National Statistics Office) collected prices from 99.6% villages and 98.3% urban markets while the market-wise prices reported therein were 88.8% for rural and 91.3% for urban,” it added.