India’s Retail Inflation Eases in August as Food Prices Moderate

Introduction

India’s retail inflation eased in August as food prices moderated, but remained above the upper end of the central bank’s target band for a second consecutive month, keeping policymakers watchful.

Key Statistics

• August CPI: 6.83% vs 7.44% in July
• August food inflation: 9.94% vs 11.51% in July
• Vegetable inflation: 26.14% in August vs 37.34% in July

Details

Annual retail inflation in August was 6.83%, compared with 7.44% in July – a 15-month high – according to data released by the Ministry of Statistics on Tuesday. The August print was lower than the 7% estimate of 45 economists polled by Reuters.

Impact on Food Prices

Food inflation, which accounts for nearly half of the overall basket, was up 9.94% in August compared with a rise of 11.51% in July. Vegetable inflation eased to 26.14% in August from 37.34% in the previous month.

“Offering a modicum of relief, the CPI inflation eased below the 7% mark … largely led by vegetables, amidst some moderation in the prints for clothing and footwear, housing and miscellaneous items as well,” said Aditi Nayar, economist at ICRA.

Concerns and Measures

Food prices have been a key concern for policymakers since last year as erratic weather conditions have hurt the output of vegetables, milk, and cereals. Inflation has been above the central bank’s 2%-6% target band for seven months out of the last 12.

In its efforts to rein in domestic inflation, India’s government banned exports of non-basmati white rice last month and imposed a 20% duty on exports of parboiled rice, while imposing a 40% tax on onion exports. It has banned exports of wheat since last year.

Future Outlook

Inflation is expected to remain elevated in the coming months as a weak monsoon, lower reservoir levels, and rising crude prices are likely to keep the pressure on food prices. Crude oil prices have also started inching up, with Brent rising above $90 a barrel last week for the first time in 10 months.

India also lowered the price of cooking gas cylinders sold to 330 million households and might even expand its free food program beyond December.

Core inflation, which strips out volatile food and energy prices, was estimated to be between 4.6% and 4.9%, compared with 4.9% to 4.97%, according to three economists. The Indian government does not release core inflation figures.

“RBI is likely to hold on to the repo rate and stance under these conditions. Chances of a rate hike are kept aside under the declining inflation scene,” said Madan Sabnavis, chief economist at Bank of Baroda.

Conclusion

India’s retail inflation eased in August due to moderation in food prices, providing some relief to policymakers. However, concerns remain as inflation remains above the central bank’s target band. The government has implemented measures to control food prices, but future outlook suggests that inflation may remain elevated in the coming months.

Reporting by Nikunj Ohri; editing by Christina Fincher and Alex Richardson

Our Standards: The Thomson Reuters Trust Principles.