Retail inflation declined to 4.35 percent in September mainly due to lower food prices, according to government data released on Tuesday. The Consumer Price Index-based (CPI) inflation was at 5.30 percent in August and at 7.27 percent in September 2020.
As per the data released by the National Statistical Office (NSO), the inflation in the food basket eased to 0.68 percent in September 2021, significantly down from 3.11 percent in the preceding month.
The Reserve Bank of India (RBI), which mainly factors in CPI-based inflation while arriving at its bi-monthly monetary policy, has been tasked by the government to keep it at 4 percent with a tolerance band of 2 percent on either side.
Rupa Rege, Nitsure, Group Chief Economist with L&T Finance Holdings said the figure is in line with expectations. She pointed to the RBI governor’s statement on Friday that inflation will be aided favourably by statistical base effects.
“This was very much expected, but definitely, we have been seeing such high volatility in food article prices, especially vegetables and fruits etc., perishable prices that one cannot be so out the trajectory of food inflation. So definitely from that perspective, it is a pleasant surprise,” she said.
She, however, said that one cannot be so sure about the trend in food inflation but certain aspects of food inflation and fuel inflation pose risk to inflation trajectory.
Last week, RBI Governor Shaktikanta Das had said that overall, the CPI headline momentum is moderating, which combined with favourable base effects in the coming months, could bring about a substantial softening in inflation in the near term.
RBI has projected the CPI inflation at 5.3 percent for 2021-22, 5.1 percent in the second quarter, 4.5 percent in third and 5.8 percent in the last quarter of the fiscal with risks broadly balanced.
Saugata Bhattacharya, Chief Economist at Axis Bank said, “It is a great number, we were also at 4.5, just like in line with market consensus. The initial data for vegetables certainly show a rise in the early October months. Overall, food prices should still remain relatively controlled.”
According to Bhattacharya sowing has been good as RBI governor mentioned reservoir levels, except in the north still remain good. Therefore, not just kharif but rabi prospects are also fairly good.
“Overall, from whatever we are seeing in terms of core inflation, our expectation was 6 percent and the actual number has come at 5.75 core. So whatever little is good, because that pulls down the entire trajectory of the CPI index,” he said.
Bhattacharya added that going forward price pressures will be slightly lower than what was seen initially. “But given supply dislocations that we are seeing, we still need to be very careful on the particularly in the core,” he added.
DK Joshi, Chief Economist at CRISIL said, the agency will reduce the forecast for the third and fourth quarter.
“The food inflation is turning out to be more benign than what we had expected. There is a base effect that plays here and this base effect is going to keep the food inflation down almost till the end of the year. After that, for inflation to remain down, it is very important that the supply side bottlenecks start easing. Otherwise, the food inflation will start inching up on the base effect and at the same time the core and fuel will remain high,” he explained.
He said that inflation worries have not gone away and if one looks at RBI’s industrial outlook survey in the monetary policy report, it clearly states that whether it is the manufacturing sector or services or infrastructure, the expectation from entities is that there is cost escalation and they also see a rise in selling price for the third quarter.
“Clearly, there is pressure on inflation that will be there in the third quarter from fuel as well as from the core side. The food element, which will keep it down, is a very volatile component of overall inflation and very hard to project, the rains can cause some temporary spikes there. So, I would say that it is a good number,” Joshi said.
On what to expect from RBI in December in terms of reverse repo hike Jayesh Mehta, MD & Country Treasurer of Bank of America said, market consensus is of a reverse repo hike but there are too many aspects in place to play at this juncture.
“If you look at last 10 days, the way the world energy, the world shortages in coal, including India, right now, this is like half empty half full. Some people who may worry about this will pull up the inflation and therefore forcing central banks to take what needs to be done to manage inflation, which does not work because this kind of energy supply issues can also destabilise growth, global growth, including India.”
If the energy problems do not get resolved, there will be hyperinflation but at the same time growth would also go away, he explained.
“At that particular thing, I don't think any of the central bank would really focus on inflation. Rather, they would still work on growth. So I am not with the market consensus, it is too early to say how these things are playing out. Right now, we are in a very, very uncertain global situation, we don't know what is happening and that is where we will have to wait and watch for some time what happens to these shortages across the energy sector.”
For the full interview, watch the accompanying video...
-With PTI inputs