Retail inflation eases, still above RBI’s comfort level

NEW DELHI: Retail inflation eased in August on the back of moderating food prices but remained above RBI’s comfort level while factory output growth continued to be robust in July, providing comfort to policymakers.
Data released by the National Statistical Office (NSO) on Tuesday showed retail inflation, as measured by the consumer price index (CPI), rose an annual 6.8% in August, slower than the 15-month high of 7.4% in July, bringing much-needed relief. Food inflation eased to 9.9% in August from 11.5% in July. Rural inflation was higher at 7% while urban recorded 6.6%. Inflation in vegetables slowed to 26.1% in August from 37.4% in the previous month.
“Notwithstanding the reversal of the relatively transient spike in tomato prices, the outlook for food inflation remains on edge, on account of other vegetables like onions, as well as kharif crops with a year-on-year lag in sowing such as pulses. Well distributed rainfall in the rest of September could help to protect kharif yields, even as reservoir levels do not portend well for an early kick-off of rabi sowing,” said Aditi Nayar, chief economist at ratings agency ICRA.
The frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022 and the central bank will remain watchful of this also, RBI governor Shaktikanta Das said in a recent speech.

Experts said RBI is expected to hold interest rates as it keeps a watch on the trajectory of food prices. “We expect the RBI to look through the July-August lift in inflation due to sharp spike in vegetable prices and maintain status quo on rates and stance in the October policy,” said D K Joshi, chief economist at ratings agency Crisil.
“Food inflation will remain a key monitorable for them because, if sustained, it can spill over to other components and steer the headline CPI inflation above the RBI‘s target,” said Joshi.
Separate data showed the IIP rose 5.7% in July, higher than the 3.7% in June on the back of a robust performance by the manufacturing sector. The manufacturing sector, which accounts for nearly 78% of the IIP, rose 4.6% in July from 3.1% in the year earlier month. “The purchasing Managers Index (PMI) for manufacturing at a 3-month high of 58.6 in August points towards improved prospects for IIP growth. We believe that the strength of industrial production in the coming months will be tested by the external environment as the global slowdown is expected to intensify in the second half of the year,” said Joshi.