India’s Retail Inflation Increases To Eight-Month High Of 7.34%, Will RBI’s Tough Growth Promotion Strategies Yeild Results?

retail inflation rate india

In September, India’s retail inflation increased to an eight-month high of 7.34% over increasing prices of essential kitchen items, government data showed on Monday, making the Reserve Bank of India’s RBI’s task to push growth by reducing the interest rate even more tough in the coming weeks.

In August, the Consumer Price Index (CPI)-based inflation was 6.69% and 3.99% in September last year. Last month, retail inflation, which is calculated by the consumer price index (CPI), rose to 6.69%. The increase in the price of food, as well as transport and mobile phone bills, were the driving forces behind the surge. The figure was 0.04 percentage points lower compared to July, but still bigger than the Reserve Bank of India’s (RBI’s) comfort level, 6% — the fifth time in as many months that it has surpassed this.

The central bank factors in retail inflation while deciding on its key interest rate. Inflation has been hovering above 4% since October 2019. The previous high in the CPI was witnessed at 7.59% in January 2020.

According to the National Statistical Office (NSO) data, the Consumer Food Price Index (CFPI) was 10.68% in September 2020, up from 9.05% in the previous month. In the vegetable segment, the inflation was 20.73% in September, way up from 11.41% in the preceding month. The rate of price rise in the fruits was also high over August. According to the data, the rate of price rise in the protein-rich eggs was 15.47% in September compared to 10.11% a month before that.

According to the ICRA Limited economist Aditi Nayar, the CPI inflation hardened beyond expectations in September 2020. Even though the high food inflation will eventually prove to be transient, with the favorable base effect and Kharif arrivals to soon initiate a downward trajectory, the average inflation figures for the current financial year, as well as H2 FY2021, are likely to be uncomfortably high, according to news agency PTI.

Even in the meat and fish, the retail inflation was high month-on-month and pulses and products. Still, it was lower in milk and products and cereals and products. The government data further showed that during September the CPI-based price rise was lower in the ‘fuel and light’ segment at 2.87% over 3.10% in August.

According to Nayar, amidst the unpalatable headline and food inflation figures, the fairly safe core inflation over the last three months offers some relief, keeping the hopes of a February 2021 rate cut alive.

The government has asked the RBI to keep the retail inflation at 4%, with a margin of 2% on either side. RBI Governor Shaktikanta Das had said last week while announcing the monetary policy, that retail inflation is expected to remain close to the targeted level by the last quarter of the current fiscal year.

Industrial production contracted at a slower pace in August than in the month before as the economic recovery gathered pace. However, retail inflation climbed to an eight-month high in September, driven by higher food prices, potentially delaying further monetary easing.

Industrial production, as measured by the index of industrial production (IIP), shrank 8% in August with all its constituents contracting against a 1.4% decline in the same period last year. Revised data showed industrial production contracted 10.7% in July and 15.7% in June. Earlier estimates had shown IIP shrinking 10.4% in July.

The steepest decline in capital goods

In the first five months of FY21, India’s factory output shrank 25% compared with 2.4% growth in the year-ago period.

“Though economic activities are yet to reach the pre-Covid-19 level, it is gaining traction with each passing month, albeit at a reduced pace,” said India Ratings principal economist Sunil Kumar Sinha.

Manufacturing, mining and electricity contracted 8.6%, 9.8% and 1.8%, respectively.

While all IIP subsectors were deep in the red, capital goods – an indicator of investment–witnessed the steepest decline of 15.4%. Barring tobacco products, basic metals and transport equipment, the other 20 manufacturing subsectors reported a contraction in August. Consumer durables production, an indicator of urban demand, declined 10.3%. Consumer nondurables shrank 3.3%.

Other data released on Monday showed the economy gathered pace in September after plateauing in August. Goods and services (GST) tax collections, power demand and e-way bills were among a number of indicators that were higher in September from a year ago.

The contraction in industrial production is expected to narrow further in September on course to possible positive growth in October because of festive spending and stimulus measures announced by the government on Monday.