Posted in economics

Addressing India’s Inflationary Woes

Dr. Debesh Roy, Chairman, InsPIRE

Introduction

The global economy is hamstrung with rising inflation and slowing growth. Inflation is now well-entrenched across the world, and is definitely not transitory in nature, as thought by US Fed Chair Mr. Jerome Powell and several economists, few months ago. The US consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. Similarly, inflation in the UK touched a 40-year high of 9% in April, and is expected to touch 9.1% in May. Further six member states of the EU have inflation rates above 10%, and the average is 8.1%. Most developing countries have been suffering from the wrath of inflation and slowdown in economic growth. Inflation in developed as well as developing economies has been sparked by low interest rates and government stimulus to counter the Covid-19 pandemic’s impact, and disruption in global supply chains, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis.

India has been witnessing rise in retail inflation above the Reserve Bank of India’s (RBI) mandated tolerance level of 6%, from January 2022. Wholesale inflation, however, started rising alarmingly from March 2021, onwards. The RBI and Government of India (GoI) have initiated monetary and fiscal measures, respectively, to curb inflation.

Easing of India’s Retail Inflation

India’s retail [Consumer Price Index (CPI)] inflation eased in May 2022 to 7.04% from an almost eight years high of 7.79% in April (Figure 1). However, it remained above RBI’s upper tolerance level of 6% for the fifth month in a row.  There was a broad-based deceleration in inflation, mainly on account of slower increases in food prices. Core inflation, too, moderated in May to 6.09% from 6.96% in the previous month.

The slowing down of inflation was mainly on account of deceleration in rural CPI inflation, which declined significantly from 8.38% in April 2022 to 7.01% in May (Figure 1), as a result of a decline in the combined weighted contribution of health, education and personal care and effects by 35 basis points (bps), and 40 bps decline in the weighted contribution of food and beverages. Urban inflation, however, declined marginally from 7.09% in April to 7.08% in May (Figure 1). Favourable base effect, too contributed to the decline in inflation. However, there are more upside risks to inflation, with international crude oil prices remaining stubbornly high.

Source: Data accessed from MoSPI, GoI

The consumer food price inflation (CFPI) is the major determinant of retail inflation in India, with a weightage of 39.1% in the CPI. During the six-month period December 2021 to May 2022, CFPI more than doubled from 4.05% in December to 8.31% in April, before dropping to 7.97% in May (Figure 2). This was due to elevated oils and fats inflation at 24.3% in December to 13.3% in May (Figure 3) and a sharp increase in vegetable inflation from -3% in December to 18.3% in May (Figure 5). India imports nearly 60% of its crude edible oil requirement. Around 90% of India’s annual crude sunflower oil requirement of 22-23 lakh tonne is imported from Ukraine to the tune of 70% and 20% from Russia and the remaining 10% from Argentina. The Ukraine-Russia conflict has disrupted supplies of sunflower oil and sharply pushed up its price in the international market, impacting India’s import cost.  

The principal reason for a sharp rise in vegetable prices is the increase in transportation cost due to high fuel price, which in turn is the result of elevated international price of crude oil. High tomato prices, due to fall in production on account of heatwaves prevailing in different parts of the country, also impacted vegetable inflation.

Source: Data accessed from MoSPI, GoI

While cereal inflation increased steadily from 2.6 % in December 2021 to 5,3% in May 2022, pulses inflation declined from 2.4% to -0.4% during the same period (Figure 3). Decline in pulses inflation was on account of record estimated production of pulses in the Kharif and Rabi seasons in the year 2021-22, as well as higher imports of Arhar and Urad.

Source: Data accessed from MoSPI, GoI

Inflation in eggs declined sharply from 4.2% in February to -4.6% in May (Figure 4). Meat and fish inflation rose to 8.2% in May from 7% in the previous month, before falling from 9.6% in March, while milk inflation increased steadily from 3.8% in December 2021 to 5.6% in May 2022 (Figure 4).

Source: Data accessed from MoSPI, GoI

Fruit inflation declined sharply from 5% in April to 2.3% in May, while sugar inflation fell from 5.2% to 4.3% (Figure 5).

Source: Data accessed from MoSPI, GoI

Fuel and light inflation remained elevated during the period at 11% in December 2021, 10.8% in April 2022 and 9.5% in May 2022 (Figure 6), on account of high international crude oil prices, with Brent crude prices remaining around $120 per barrel.

Source: Data accessed from MoSPI, GoI

Surging Wholesale Inflation

India’s wholesale price index (WPI) inflation increased from 15.1 in April to 15.9% in May, the highest level since August 1991, driven by soaring inflation of primary articles (15.5% to 19.7%) and fuel and power inflation (38.7% to 40.6%) (Figure 7). The wholesale inflation of manufactured products, however, eased from 10.9% to 10.1% (Figure 7).

Figure 8 shows that, the gap between wholesale and retail inflation narrowed down from 8.61% in December 2021 to 7.29% in April 2022, before rising to 8.84% in May. This was when retail inflation eased from 7.8% to 7% and wholesale inflation surged from 15.1% to 15.9%.

WPI inflation in the country has been increasing much faster than CPI inflation, since March 2021. Consequently, it is expected that retail inflation would slowly move closer towards wholesale inflation, in the months to come.  Dr. Pronab Sen, former Chief Statistician of India has put it succinctly: “Rising WPI will, by and large, translate into higher retail prices.” High wholesale inflation indicates that input price pressures are still quite high, which will eventually reflect on retail prices.

Source: Data accessed from Office of the Economic Adviser, DPIIT, Ministry of Commerce & Industry, GoI
Source: Data accessed from MoSPI, GoI and Office of the Economic Adviser, DPIIT, Ministry of Commerce & Industry, GoI

Addressing Inflationary Woes

The RBI raised the policy repo rate by 40 bps in May 2022 and 50 bps in June 2022. The central bank is no longer behind the curve and the transmission of the rate in the banking system is also expected to be reasonably quick. While increasing the repo rate could hurt India’s economic recovery, the inability to control inflation will hurt the country’s growth prospects in the medium to long term.

RBI’s inflation projection for FY23 is 6.7%. It is expected that RBI’s Monetary Policy Committee (MPC) could raise the policy repo rate by 60-85 bps by December 2023, i.e., to 5.5-5.75%, depending on the inflation trajectory. A further cause for concern is the depreciation of the rupee, which could worsen inflation. RBI Governor Mr. Shaktikanta Das, in his June 08, 2022 statement on the Monetary Policy has expressed RBI’s approach to control inflation as: “Our approach underscores a commitment to move towards normal monetary conditions in a calibrated manner. We will remain focused on bringing down inflation closer to the target and fostering macroeconomic stability.”

The full impact of the measures announced by the government, viz, excise duty cuts on petrol and diesel, could be seen in the June inflation figure, as the cut in excise duty was announced in the last week of May. With the end of Russia-Ukraine conflict nowhere in sight, inflationary situation could worsen across the world. Although there has been a steady rise in revenue collection so far in FY23, GoI may have to tread the tightrope of balancing excise duty cut for controlling fuel inflation with incurring the budgeted capital expenditure for economic growth.

Posted in economics, MARKET ECONOMY

US Inflation at 8.6% in May 2022 Surges Past Four-decade High Record

Dr Debesh Roy, Chairman, InsPIRE

The U.S. consumer inflation surged ahead to touch a more than four decades high of 8.6% annual rate in May 2022, due to spiraling energy and food prices. There has been no respite from the upward movement of retail inflation in the US since February 2021, which had a benign reading of 1.7% to 5% in April 2021, followed by a steady 5.3-5.4% during July-September, when the Federal Reserve Chair Mr. Jerome Powell was convinced that inflation was transitory in nature. However, October (6.2%) onwards inflation continued to rise unabated touching a 40-year high in March 2022, followed by a slight drop to 8.3% in April, before rising to 8.6% in May 2022 (see figure below). The core-price index increased 6% in May, down from 6.2% in April. March’s 6.5% rise was the highest rate since August 1982.

High inflationary trend is a downside of strong growth in the US, sparked by low interest rates and government stimulus to counter the Covid19 pandemic’s impact, followed by elevated energy and commodity prices due to the Russia-Ukraine crisis. Further, price pressures are strong across much of the US economy partly due to an unusually tight U.S. labor market, with demand for workers outstripping supply.

Source: U.S. Bureau of Labor Statistics

The rise in May inflation was driven partly due to sharp rises in the prices for energy (34.6%) from a year earlier, and groceries (11.9%). The surge in inflation belied hopes among some analysts about the nearing of peak inflation, primarily due to further rise in energy prices, as a result of the prolonged Russia-Ukraine conflict, and a steady rise in services-related costs, mainly those linked to the travel industry.

The US Federal Reserve seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Accordingly, the Federal Open Market Committee (FOMC) had decided to raise the target range for the federal funds rate to 3/4 to 1% at its May 04, 2022 meeting, while anticipating that ongoing increases in the target range will be appropriate. With the May inflation print at more than 40-year high, Ms. Lael Brainard, the vice-chair of the Federal Reserve, has warned that the US central bank may need to extend its run of half-point rate rises into September if inflation does not slow sufficiently in the coming months.

Posted in economics, MARKET ECONOMY

RBI Intensifies its Attack on Spiraling Inflation

Dr Debesh Roy, Chairman, InsPIRE

The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) on 8th June 2022, unanimously decided to raise the policy repo rate by 50 basis points (bps), the steepest increase in more than nine years, to 4.9 per cent. This is the second hike in the repo rate in just over a month, adding up 90 bps from 4 per cent set in May 2020, with a view to controlling inflation, aggressively. While the RBI was behind the curve to control inflation till the April MPC meeting, it took a decisive step to control spiraling inflation by raising the first repo rate hike in two years by 40 bps in the off-cycle MPC meeting  on 4th May 2022.

The MPC has increased the inflation forecast by 100 bps to 6.7 per cent for fiscal year (FY) 2022-23, and has projected an inflation rate of 7.5 per cent, 7.4 per cent, and 6.2 per cent for Q1, Q2 and Q3 of FY23, respectively. For the first time since the flexible inflation-targeting framework was introduced in October 2016, for policy repo rate setting by the MPC, the RBI, in all likelihood, will fail to achieve its mandate – which is to keep the average inflation at 4 per cent with a +/- 2 per cent tolerance limit – for three consecutive quarters. As per the mandate, RBI would need to explain to Government of India the reasons for inflation exceeding the upper tolerance limit of 6 per cent for three consecutive quarters.

Inflation is now a global phenomenon, due to the Ukraine-Russia war, Covid-related lockdowns in China and global supply chain disruptions. As stated by RBI Governor Mr. Shaktikanta Das, “The war has led to globalisation of inflation. Not surprisingly, central banks are reorienting and recalibrating their monetary policies. Emerging market economies (EMEs) are facing bigger challenges from increased market turbulence, monetary policy shifts in advanced economies (AEs) and their spillovers. The process of economic recovery in EMEs is also getting affected”.

The MPC also decided to drop the accommodative stance to “remain focused on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”. As RBI has embarked on an aggressive policy tightening cycle,  the MPC is expected to resort to calibrated tightening and could  decide on two more hikes of 25 bps each in FY23, taking the repo rate to 5.65 per cent by March 2023.

However, there could arise a risk of a wide divergence from RBI’s inflation projections, which could result in a sharper rate hike. Research by SBI shows that RBI could factor in a rate hike in August and even October MPC meetings, and take the repo rate higher than pre-pandemic level by August to 5.25 per cent and in October to 5.5 per cent. The peak rate at the end of the cycle, according to the SBI report now has a lower bound of 5.5 per cent and could go up to 5.75 per cent, depending on inflation trajectory.

Banks have raised their lending rates in response to the rise in the repo rate. This will cause borrowers to pay higher equated monthly instalments for their loans. Further, the demand for loans by retail as well as corporate borrowers would fall, restricting economic activities.

The RBI, however, has kept its growth forecast unchanged at 7.2 per cent for FY23,  with Q1, Q2 and Q3 growth at 16.2 per cent, 6.2 per cent,  4.1 per cent; and 4.0 per cent, respectively, with risks broadly balanced. According to the MPC statement, the recovery in domestic economic activity is gathering strength due to the following factors:

  • Rural consumption should benefit from the likely normal south-west monsoon and the expected improvement in agricultural prospects;
  • A rebound in contact-intensive services is likely to bolster urban consumption, going forward;
  • Investment activity is expected to be supported by improving capacity utilisation, the government’s capex push, and strengthening bank credit;
  • Growth of merchandise and services exports is set to sustain the recent buoyancy.

However, the MPC has warned that spillovers from prolonged geopolitical tensions, elevated commodity prices, continued supply bottlenecks and tightening global financial conditions nevertheless weigh on the growth outlook.

Posted in economics

RBI hikes Policy Repo Rate and CRR to address Rising Inflation

Dr Debesh Roy, Chairman, InsPIRE

In the face of an unabated rise in inflation, the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), in an off-cycle meeting held on 2nd and 4th May 2022,  decided to raise the policy repo rate by 40 basis points (bps) to 4.4 per cent, and the cash reserve ratio (CRR)  by 50 bps to 4.5 per cent. This is the first hike in repo rate after almost two years.

The timing of the hike came as a surprise to the financial markets, with the Sensex crashing by 1,307 points, or 2.29 per cent lower than the previous day’s close (3rd May 2022). However, it was expected by economists that the MPC would start raising the policy repo rate anytime soon during FY23, as CPI inflation remained above RBI’s tolerance level of 6 per cent during the three months January-March 2022. Inflation in March 2022 was much above the tolerance limit at 6.95 per cent. The inflation outlook remained grim in the context of rising food prices, apart from the rise in global prices of crude oil, wheat and sunflower oil due to global supply disruptions on account of the Russia-Ukraine conflict.  

Further, the decision by Indonesia to ban exports of palm oil, due to fall in domestic production on account of labour shortage in the country, has resulted in a sharp rise in price of edible oils in India, which depends on imports from Indonesia for 60 per cent of its demand for palm oil.

The MPC in its previous meeting during 06-08 April 2022 had decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. In its off-cycle meeting, the MPC using an almost similar language, continued to maintain an accommodative stance, while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.

The MPC has stated that inflation would “rule at elevated levels, warranting resolute and calibrated steps to anchor inflation expectations and contain second round effects”. Given RBI’s projection of 5.7 per cent inflation during FY23, which could well be revised upwards, it can be expected that the RBI would increase the policy repo rate going forward by 75 bps to touch the pre-pandemic level of 5.15 per cent by end March 2023. Further, the CRR hike by 50 bps will result in an upward pressure on interest rates while withdrawing system liquidity by an additional INR 87,000 crore.

While loans to retail and micro, small and medium enterprises (MSME) borrowers, linked to the policy repo rate will become costlier with immediate effect, interest rates on corporate loans will rise within a month or so. Following the decision of the RBI to raise the policy repo rate, Bank of Baroda and ICICI Bank raised their external benchmark-linked lending rates by 40 bps each.

While costlier loans to productive sectors would have an adverse impact on India’s growth prospects, the country can still maintain its position as the fastest growing large economy in the world, with the government having prioritized investment in infrastructure, while also carrying forward its agenda of structural reforms, in addition to a focus on export-oriented manufacturing through the production linked incentive (PLI) scheme, and investment in education and health.

Posted in economics

Wholesale inflation surges to 4-month high in March 2022

Dr Debesh Roy, Chairman, InsPIRE

India’s Wholesale Price Index (WPI) inflation surged to a 4-month high of 14.55 per cent in March 2022, which was a sharp rise from 13.11 per cent in the previous month. This was the result of an unfavourable base effect (1.3 per cent in March 2021) and broad-based rally in global commodity prices, especially crude oil, due to the Russia-Ukraine conflict. With this, WPI remained in double digits throughout FY22. The average inflation at 12.94 per cent in FY22 is the highest in three decades.

While wholesale food inflation rate eased sequentially from 8.19 per cent to 8.06 per cent in March 2022, vegetable inflation dropped sharply from 26.93 per cent in the previous month, but remained elevated at 19.88 per cent. Among non-food items, crude oil inflation increased by a whopping 83.56 per cent, leading to a fuel inflation of 34.52 per cent during March 2022. Manufactured price inflation rate rose to 10.71 per cent during the month, from 9.84 per cent in the previous month, as edible oil and basic metals inflation rose to 16.06 per cent and 25.97 per cent, respectively. Core inflation, which excludes volatile food and fuel items, increased from 10 per cent in February 2022 to 10.9 per cent in March 2022.

Although WPI is not the primary index which guides the Reserve Bank of India’s (RBI) monetary policy decisions, it cannot be ignored by the central bank, as rising input costs can feed CPI inflation. This is likely to happen with businesses passing on the rising input costs to retail prices. The gap between WPI and CPI has narrowed from 9.96 percentage points in November 2021 to 7.60 percentage points in March 2022. CPI inflation is on a rising trend since November 2021 and has shot up to a 17-month high of 6.95 per cent in March 2022. What is worrisome is that retail inflation has remained above RBI’s tolerance level of 6 per cent for the third consecutive month.

RBI’s latest industrial outlook survey indicates that manufacturing sector firms expect higher input and output price pressures going forward. Further, on the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of US$ 100 per barrel, RBI, in its latest monetary policy (8 April 2022) has projected 5.7 per cent inflation in 2022-23. While the Monetary Policy Committee (MPC) has unanimously decided to maintain the accommodative policy stance, it will focus on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth. Globally inflation is on the rise, and will continue to remain elevated even after the Russia-Ukraine conflict comes to an end. The uncertainty surrounding the conflict makes it difficult to estimate inflation during the next one-year period. This is true for most countries, including India. Going forward, RBI could raise the policy repo rate by 50 basis points (bps) during FY23.

Posted in economics

Status of Inflation in India – September 2021

Dr Debesh Roy, Chairman, InsPIRE

Retail Inflation

India’s Consumer Price Index (CPI) inflation fell sharply from 5.3% in August 2021 to  4.35% in September 2021, coming closer to RBI’s medium-term inflation target of 4%, and continuing its declining trend for the fourth consecutive month (Figure 1). A sharp decline in food inflation was primarily responsible for the decline in general inflation. While rural inflation dropped to 4.13% in September from 5.28% in the previous month, urban inflation declined from 5.32% to 4.57%. The retail inflation trend for the first half of FY22 reveals a sharp rise from 4.23% in April to 6.3% in May, before tapering to 6.26% and 5.59% in June and July, respectively.

The RBI in its latest Monetary Policy on 8 October 2021 had sharply reduced the outlook for CPI inflation during FY22 from 5.7% projected in the previous MPC meeting (04-06 August 2021) to 5.3%. However, the IMF in its October 2021 issue of World Economic Outlook raised its inflation projection for India from 4.9% estimated in April to 5.6%, citing growing worldwide inflationary risks.  

Source: MOSPI, GoI

The main cause for the decline in retail inflation in September is the sharp easing of food inflation (Figure 2). The Consumer Food Price Inflation (CFPI) declined steadily from 5.15% in June 2021 to 3.96% in July and 3.11% in August, before it fell sharply to 0.68% in September. Sharp decline in inflation was observed in respect of vegetables (-11.68% to -22.47%) and eggs (16.33% to 7.06%). Inflation for cereals continued to be  negative at -0.61%. However, inflation for edible oils (34.19%) and non-alcoholic beverages (12.99%), remained elevated.

Fuel inflation increased from 12.95% to 13.63%, due to continuous rise in international crude oil prices. Core inflation, which excludes food and fuel prices, however, rose from 5.5% in August to 5.8% in September.

Source: MOSPI, GoI

Further easing of food inflation in the coming months due to good kharif harvest, and favourable base effect, will keep inflation benign. This would give enough leeway to the RBI to continue with the accommodative stance, at least till April 2022 monetary policy review. However, inflation risks remain high due to elevated international commodity prices, including crude oil prices. Further, price pressures could intensify due to the second-round effects of high fuel costs, resulting in higher prices of other goods, after a time lag.

Wholesale Inflation

India’s WPI inflation declined to 10.66% in September, the lowest in six months,   from 11.39% in August (Figure 3). However, the continued high WPI inflation was on account of high inflation of manufactured products (weight of 64.2%) in May, June, July, August and September at 11.25% 10.96%, 11.2%, 11.39% and 11.41%, respectively.

It is evident that cost push pressures are gradually seeping into prices of manufactured goods, due to increase in manufacturing activities in the post-pandemic situation. The highest inflation was observed in case of crude petroleum and natural gas at 59.5%, 46.97%, 40.28%, 40.03% and 43.92%, respectively, during the last five months, due to steady increase in the international price of crude oil.

Fuel and power inflation at 36.74%, 29.32%, 26.02%, 26.09% and 24.81 respectively   in May, June, July, August and September. The decline in WPI inflation was due to reduction in food inflation from -1.29% in August to -4.69% in September, 2021.

Price volatility in the international markets for crude oil and rising prices of edible oils and metal products would lead to further rise in WPI inflation, considering the fact that India is a price taker for most of these commodities.

Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GoI

There continues to be a divergence between CPI and WPI inflation (Figure 4) because of the nature of the price indices and higher weighting of food items in CPI (47.25% against 15.26% for WPI) and that of manufactured items in WPI (64.23%).

Source: MOSPI, GoI and Office of the Economic Adviser, Ministry of Commerce and Industry, GoI
Posted in economics

United States Retail Inflation – August 2021

Bijetri Roy, Managing Director & Chief Strategy Officer, InsPIRE

The US consumer price inflation has eased marginally to 5.3% in August 2021, compared to 5.4% in the previous month, as per the Bureau of Labor Statistics (Figure 1). The cooling of inflationary pressures is associated with the economic reopening from Covid-19 lockdowns, while still remaining near a 13-year high. Month-over-month price increase, too slowed, with an increase of 0.3% from July.

However, this is much lower than the 0.9% increase reported between May and June and a drop-off from the 0.5% rise from June to July. While inflation remained benign during January to March, it increased sharply to 5% in April and continued to remain elevated at 5% and above during April to August 2021 (Figure 1).

Source: Bureau of Labor Statistics, USA

Core inflation, which excludes volatile items such as food and energy, also declined. The monthly figure for August fell to 0.1%, which was the smallest increase since February 2021. On a year-over-year basis, core inflation declined to 4% from 4.3% in July.

Inflation in the US during the current year has been mainly influenced by price rises in sectors most sensitive to supply bottlenecks and other pandemic-related disruptions. The inflation data for July revealed the initial signs of the abating of price increases, especially in respect of used car and truck prices and travel expenses, which have been the major drivers of inflation.

The inflation print corroborates with the view of the US Federal Reserve about inflation being transitory in nature.

According to the August 2021 Survey of Consumer Expectations of the Federal Reserve Bank of New York short- and medium-term inflation expectations increased to new series highs of 5.2% and 4.0%, respectively. Home price growth expectations continued to moderate in August but remain elevated. Households’ perceptions about their current financial situations improved, and income growth expectations rose to a new series high.

Posted in economics

Status of Inflation in India – August 2021

Dr Debesh Roy, Chairman, InsPIRE

Retail Inflation

India’s retail inflation, measured by the Consumer Price Index (CPI), cooled down for the second consecutive month to 5.3% in August 2021, from 5.6% in the previous month (Figure 1), thereby moving further below the Reserve Bank of India’s (RBI) upper tolerance limit of 6% inflation. This gives credence to RBI’s view about the transient nature of the elevated level of inflation, driven by “exogenous and largely temporary supply shocks”  during Covid times, justifying the continued accommodative monetary policy stance of the central bank for supporting growth.

During the last six months inflation remained above RBI’s medium-term target of 4%, and even exceeded the upper tolerance limit of 6% in May and June, at 6.3% each, on account of high food and fuel prices. Both rural and urban inflation also remained in the range of 6.0%-6.6% during these two months, before sliding down to below 6.0% in July and August.

Source: MOSPI, GoI

The principal reason behind the decline in retail inflation in August is the easing of food inflation (Figure 2). The Consumer Food Price Inflation (CFPI) declined steadily from 5.2% in June 2021 to 4.0% in July 2021and 3.1% in August 2021.  Food inflation fell as vegetable, cereal and sugar inflation declined by 11.7%, 1.2% and 0.6%, respectively, during the month, though inflation for protein items such as edible oils (33%), pulses (8.8%), eggs (16.3%) and meat and fish (9.2%) remained elevated.

Fuel inflation (12.95%) increased and services inflation also remained high at 6.4% in August. Core inflation excluding food and fuel prices rose by a slower 5.5% in August against 5.7% in July.

Source: MOSPI, GoI

Favourable base effect, along with further easing of food inflation in the coming months due to possible good kharif harvest, will enable inflation to remain benign. This would give enough leeway to the RBI to continue with the accommodative stance, at least till February 2021 monetary policy review. However, inflation risks remain high due to elevated international commodity prices, including crude oil prices. Further, price pressures could intensify due to the second-round effects of high fuel costs, resulting in higher prices of other goods, after a time lag. Although core CPI inflation declined by 20 bps, it remained elevated despite the presence of excess capacity. Services inflation is another potential source of upward pressure on inflation, as consumption expenditure will rise during the upcoming festive season.

RBI in the last review of the monetary policy (04-06 August 2021) had raised the inflation forecast for FY 2022 to an average of 5.7% from the earlier forecast of 5.1%. It is further expected that the central bank could, given the latest inflation print and inflation expectations, revise the  inflation estimate downwards for the full fiscal year. The September edition of RBI Bulletin, states that the softening prices of various food items was likely to extend into Q3 of FY22, which will, in effect, contain the upward pressure from fuel and core prices on headline inflation. The next monetary policy review in October 2021 would, therefore, in all likelihood maintain an accommodative stance, for the eighth time in a row, with a greater focus on liquidity management via absorption measures.  

Wholesale Inflation

India’s WPI inflation rose marginally to 11.4% in August 2021 after declining from 13.1% in May, 12.1% in June and 11.2% in July (Figure 3). The elevated WPI  inflation was on account of  high inflation of manufactured products (weight of 64.2%) in May, June, July and August at 11.3%, 11.0%, 11.2% and 11.4%, respectively.

It is evident that cost push pressures are gradually seeping into prices of manufactured goods. The highest inflation was observed in case of crude petroleum and natural gas at 59.5%, 47.0%, 40.3% and 40.0%, respectively, during the last four months. Fuel and power inflation at 36.7%, 29.3%, 26.0% and 26.1%, respectively in May, June, July and August. However, food inflation contracted by 1.29% in August.

Price volatility in the international markets for crude oil and rising prices of edible oils and metal products would lead to further rise in WPI inflation, considering the fact that India is a price taker for most of these commodities.

Source: Office of the Economic Adviser, Ministry of Commerce and Industry, GoI

There continues to be a divergence between CPI and WPI inflation (Figure 4) because of the nature of the price indices and higher weighting of food items in CPI (47.25% against 15.26% for WPI) and that of manufactured items in WPI (64.23%).

Source: MOSPI, GoI and Office of the Economic Adviser, Ministry of Commerce and Industry, GoI