If August 2023 CPI print comes in at 7%, retail inflation will average 7.2% in the first two months of the July-September quarter.
By Priyansh Verma
India’s retail inflation likely eased to 7% in August, from a 15-month high of 7.44% in July, primarily due to a softening tomato prices, according to an FE poll among 13 economists. The inflation measured by consumer price index (CPI) was 7% in August 2022 as well.
These economists expect CPI core inflation, which excludes food and fuel items, to remain flat in August.
If August 2023 CPI print comes in at 7%, retail inflation will average 7.2% in the first two months of the July-September quarter. This means that for the Reserve Bank of India’s (RBI) projection of average inflation at 6.2% for Q2FY24 to come true, the inflation will have to crash to 4.3% in September, an improbable scenario giving the current price pressures.
Even as headline CPI print stays elevated, a moderating core inflation may provide comfort to the RBI, which has kept the policy repo rate unchanged in last three monetary policy meetings.
Currently, the rate stands at 6.5%. At the projected 7%, the overall CPI index will increase marginally by 0.1% month-on-month in August. To reach 4.3% in September, CPI inflation will have to plunge 2% sequentially, a rate of fall not seen in at least 10 years.
The National Statistical Office is scheduled to release the inflation data for August on Tuesday.
“Some sequential decline in vegetable prices, majorly tomatoes, towards the latter half of August to help moderate food inflation momentum compared to July,” said Sakshi Gupta, principal economist, HDFC Bank. “Although, prices still remain elevated compared to same time last year which should keep the inflation print above 7%.”
According to data from the Department of Consumer Affairs, prices of tomato declined 6.8% month-on-month in August, while that of potato and onion rose by 2.7% and 12.6%, respectively. A sharp rise in onion prices could be attributed to weak-supply in the market in the backdrop of incessant rainfall in July.
Tomato prices, which skyrocketed in July, started easing from the third week of August mainly due to arrivals of fresh crops in the market and government intervention. The price of the crop is expected to fall even further in September.
“…we expect all of the earlier price rises to reverse completely by the end of September,” Barclays economists said in a report. As on September 6, the retail price of tomatoes was down 65.7% month-on-month.
Apart from potato and onion, price pressures were visible in cereals and pulses as well in August. During the month, the price of rice was up 2.7% month sequentially, and that of wheat was up 1.3%. Pulses prices, on an average, were also up 1.4% month-on-month.
Rice and wheat are major constituents of the ‘cereals and products’ index–which carries a weight of 9.67% in the CPI basket. ‘Pulses and products’ index carries a weight of 2.38%.
“August saw some correction vegetable prices, which had spiked in July. We expect month-on-month fall in the vegetables index in August, but in case of cereals and pulses, sequential momentum remains strong and this might lead to food inflation recording moderate gains in August,” said Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership. He added that base effect will not play any significant role in August.
Most economists believe that core inflation, which is more amenable to monetary tightening, will remain flat in August. “We expect core inflation to remain flattish at 4.85% y/y in August (July: 4.90%), with largely stable sequential price rises. Housing and costs of essential services (health and education) are driving the momentum in core inflation,” the Barclays report said.
“Still, persistence in overall core inflation has eased since early 2023, and the RBI is likely to monitor this gauge closely for its impact on headline, given the volatile nature of food prices,” it said. The RBI, which has repeatedly spoken about breaking core inflation’s persistence, may see the same playing out, as most economists project core inflation to be sticky at 5% for the rest of 2023-24.
Source:financialexpress.com