Retail Inflation in India Eases to 6.83% in August

Retail Inflation in India Eases to 6.83% in August. Image/Mint

Consumer Prices Moderating: Relief for Central Bank and Bond Investors

Retail inflation in India showed signs of moderation in August, declining to 6.83% from a 15-month high of 7.44% recorded in July. The easing of vegetable prices contributed to this decline, offering some relief to the Reserve Bank of India (RBI) and bond investors.

Inflation Still Above RBI’s Target

Despite the moderation, Consumer Price Index (CPI)-based inflation continued to surpass the RBI’s target range of 2-6%. A survey of 18 economists had estimated retail inflation to slow to 7% in August.

Food Inflation Slows

Food inflation, a significant component of the overall consumer price basket, also exhibited a slowdown. Measured by the Consumer Food Price Index, it decreased to 9.94% in August from 11.51% in July. The cooling of inflation was led by vegetables, along with some moderation in prices of clothing and footwear, housing, and miscellaneous items.

Key Highlights and Concerns

• Vegetables recorded a notable decline in inflation, falling from 37.4% in the previous month to 26.1% in August, contributing 28 basis points to the overall decline in CPI inflation.
• Economists are closely monitoring prices of cereals, pulses, and oil. The outlook for food inflation remains uncertain, particularly for items like onions and kharif crops, which face year-on-year lag in sowing.

Core Inflation Remains Stable

Core inflation, which excludes volatile food and energy prices, remained at 4.8%, aligning with market expectations.

Impact on Bond Markets

The bond markets are likely to find some relief, with yields possibly experiencing a slight downward movement in the near term. The persistence of inflation and its trajectory will determine larger market movements.

RBI’s Stance

Last month, the RBI decided to keep the repo rate unchanged at 6.50%, attributing the recent spike in vegetable prices to a demand-supply mismatch.

Data Collection and Statistics

The inflation data was collected from various urban markets and villages across India. During August, the National Statistics Office collected prices from a significant percentage of villages and urban markets, ensuring comprehensive data coverage.

In summary, the moderation in retail inflation offers some respite, but challenges remain, especially regarding food prices. The trajectory of inflation will be closely monitored by the central bank and market participants.