India retail inflation tapers to 7.04% on RBI tightening


by 5paisa Research Team Last Updated: 2022-06-14T14:35:40+05:30

After a long break, there was some positive news flows on the inflation front. The consensus estimates had pegged retail inflation at 7.01% and the actual inflation for May 2022 came in at 7.04%, almost bang on target.

This compares rather favourably with the CPI inflation at 7.79% in the month of April 2022. The fall has been largely driven by food inflation falling from 8.31% to 7.97% on expectations of another bumper Kharif season, amid good rains.

Let us first get the macro picture. Despite the fall in inflation in May 2022, this marks the fifth consecutive month when the inflation was above the upper tolerance limit of the RBI at 6%.

This is incidentally the 32nd successive month that retail inflation has remained above the RBI median target of 4% inflation. Core inflation also fell in line with the monetary tightening of the RBI. However, fuel inflation is still sticky, although it is still hidden.

Check - Government raises Kharif MSP by 5% to 9%

Big story was about lower rural inflation

One only had to quickly read the quarterly results and the MDA in the latest annual report for FY22 to get a picture of the problem. Across industries like FMCG, consumer durables, two-wheelers etc the real pain point has been rural demand. That is because rural inflation had spiked in the last few months and that had diminished the purchasing power of the rural folks. Villagers were already under stress and inflation was making it worse.

For a change, there was some real good news on the rural inflation front. For May 2022, overall rural inflation fell from 8.38% to 7.01% while the month-on-month rural food inflation fell from 8.50% to 7.76%. Now comes the riddle. It is not yet clear whether is indicative of falling prices or a signal that weak rural demand was pushing prices lower. The latter is not a good problem to have. 

As we close in on the rural story, there is still one area of concern. While the Met Department still sounds quite bullish on the monsoons, the actual situation could be worsened by the fact that the heat wave in June may impact the Kharif sowing season and have a negative impact on rural inflation. The hope is that monsoons pick up aggressively from the second week of June 2022.

Tapering in core inflation and food inflation

Two things changed for the better in the month of May 2022. The core inflation (net of food and fuel) tapered and so did food inflation during the month of May 2022. The table below captures the gist of the fall in food inflation and core inflation in the month of May 2022.

Month

Food Inflation (%)

Core Inflation (%)

May-21

5.01%

6.40%

Jun-21

5.15%

6.11%

Jul-21

3.96%

5.93%

Aug-21

3.11%

5.77%

Sep-21

0.68%

5.76%

Oct-21

0.85%

6.06%

Nov-21

1.87%

6.08%

Dec-21

4.05%

6.02%

Jan-22

5.43%

6.21%

Feb-22

5.85%

6.22%

Mar-22

7.68%

6.53%

Apr-22

8.38%

7.24%

May-22

7.97%

6.09%

 

Data Source: MOSPI / Bloomberg

A couple of important points to note about food inflation and core inflation. Despite the overall fall in food inflation, vegetable inflation spiked to 18.26% in May 2022 compared to 15.41% in April 2022 and 11.65% in March 2022.

Remember, vegetable inflation has a weightage of 13.2% in the food basket and is a major inflation trigger. On the positive side, inflation in most of the high protein foods is lower in May 2022.
Core inflation is secular in nature and tougher to control.

Normally, bringing core inflation under control entails a trade-off between inflation control and loss of revenues. For instance, the battle against inflation is having a fiscal cost in the form of duty cuts and this is translating into lower revenues. That is a very delicate tightrope that the government will have to walk on core inflation.

RBI has decided; it is inflation first and foremost

Between May and June, the RBI has already hiked the repo by 90 bps and CRR by 50 bps. That is showing up in the form of lower inflation and that is the good news. RBI has already underlined that between boosting growth and reining in inflation, it has chosen the latter.

The only risk to the RBI calculations could be from imported inflation since India still heavily depends on imports for oil, coking coal etc. That could reduce the impact of the RBI anti-inflation fight. For now, the RBI is going hammer and tongs after inflation.


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