Retail inflation hits 4-month high of 5.08% in June, halting scope for RBI rate cuts

Vegetable and Pulses Inflation Surge Continues with Double-Digit Rates [View in browser]( [See all newsletters]( 13 July 2024 Retail inflation hits 4-month high of 5.08% in June, halting scope for RBI rate cuts [Heatwave impact was seen in vegetable prices and retail inflation was up mainly due to food inflation which was 9.4 per cent] Retail inflation, measured by the Consumer Price Index (CPI), accelerated to a four-month high of 5.08 per cent in June 2024, driven by a spike in food inflation to 9.36 per cent due to rising prices of vegetables and pulses. This June 2024 reading is also higher than the 4.87 per cent recorded in the same month last year, official data released on Friday showed. The latest CPI inflation figures have reinforced the Reserve Bank of India’s decision to avoid cutting repo rates, despite two MPC members recently suggesting that maintaining high interest rates may be hindering economic growth. In May 2024, CPI inflation hit a 12-month low of 4.75 per cent, despite food inflation remaining high at 8.7 per cent. Retail inflation stood at 4.87 per cent. Cause for concern For the month under review, rural inflation has come in at 5.66 per cent (4.78 in June 2923) while urban inflation stood at 4.39 per cent (4.96 per cent). A higher rural inflation should be a cause for concern for policymakers as it would impact both consumption and investment growth. June 2024 marks the eighth consecutive month of overall food inflation being above 8 per cent according to data released by the National Statistics Office (NSO) on Friday. The latest retail inflation print of over 5 per cent is likely to spook the bond markets although it was largely in line with forecasts of economists, who had predicted the CPI to fall between 5-5.1 per cent for June 2024. The latest data is also a clear pointer that prices of vegetables and pulses are not cooling. Inflation of both vegetables and pulses continued to be in double digits at 29.3 per cent and 16.1 per cent respectively.  Pulses have been in double-digit inflation in each of the last 13 months, while vegetable price inflation has remained in double digits for eight consecutive months. RBI Governor Shaktikanta Das had on Thursday said it is too early to talk about a repo rate cut, especially when surveys indicate that the June 2024 CPI print is likely to be around 5 per cent. With the actual print coming over 5 per cent, there is now added data in support of RBI’s stance to keep interest rates on hold, said economists. Key factors Madan Sabnavis, Chief Economist, Bank of Baroda highlighted that the heatwave impact was seen in vegetable prices and retail inflation was up mainly due to food inflation which was 9.4 per cent. “Major contribution from vegetable, fruits, pulses and cereals,” he said. “With inflation back past 5 per cent, there will be no rate action by RBI. While RBI has projected inflation to come down in Q2 to less than 4 percent, the monsoon progress will determine whether this is sustainable or not,” he said. RBI expects inflation to go back to 4.5 per cent in the following quarters. Any rate action can be considered only in October and will be heavily data dependent, Sabnavis added. Aditi Nayar, Chief Economist and head of Research and Outreach at ICRA Ltd. said that the uptick in the headline CPI inflation was largely led by a rebound in the food and beverages inflation to above 8 per cent amid a sharp sequential increase in vegetable prices. “Barring food and beverages, inflation across all the other sub-groups remained below the 4.0 per cent mark in June 2024”, she added. The core CPI inched up marginally to 3.35 per cent in June 2024 from 3.28 percent in May 2024. This was the seventh consecutive print of a sub-4.0 per cent core inflation print, benefitting partly from the protracted impact of last year’s softening in commodity prices, Nayar said. ICRA is not ruling out an RBI stance change in October 2024 and a 25 bps rate cut each in December 2024 and February 2025, followed by an extended pause. This could happen if the food inflation outlook turns decidedly favourable on the back of a normal monsoon and favourable distribution of rainfall in the rest of the monsoon season, and there are no other shocks, either global or domestic. 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