India's retail inflation eases to 7.04% in May, but remains above RBI comfort level

India's retail inflation slipped marginally to 7.04 per cent in the month of May, but stayed well above the upper limit of the Reserve Bank of India's (RBI's) target range for the fifth consecutive time, according to data released by the Ministry of Statistics and Program Implementation on Monday. The decrease comes as lower fuel prices offset surging food costs.

The RBI has been mandated by the government to keep retail inflation at 4 per cent with a margin of 2 per cent on either side.

The CPI-based inflation stood at 7.79 per cent in April, 6.95 per cent in March, 6.07 per cent in February and 6.01 per cent in January. The inflation rate stood at 6.30 per cent in May 2021.

Increasing food prices have become a major concern for households already hit hard by the pandemic.

Food inflation, which accounts for nearly half the CPI basket, rose 7.97 per cent, marginally lower than 8.31 per cent in the previous month.

On Monday, the Indian rupee slumped below 78 against the US dollar dragged by foreign fund outflows amid selloffs in the stock markets. The rupee breached the 78 mark against the US dollar for the first time.

At the interbank foreign exchange market, the partially convertible rupee started the day at 78.14 per dollar against its previous close at 77.84. 

“The high frequency mandi prices so far depict some respite in sequential gains. On the other hand, the cereal prices have remained contained helped by policy intervention to regulate exports, which along with modest MSP hikes, should cap the potential for sharp upsides in the price of the staples. This along with the some cuts in import duties on a few imported food products, moderation in vegetable oil prices globally should help ease domestic edible oil prices months ahead. Nonetheless, the RBI expects CPI to average 7.5 per cent in the current quarter, which is currently slightly higher than what we currently anticipate. Overall rising price pressures remain a policy concern and are likely to pressure MPC further," said Madhavi Arora, Lead Economist, Emkay Global Financial Services.

"The narrowing gap between WPI and CPI further highlights the pass through of input costs rise from producers to consumers; as evident in elevated core inflation of 6.2%; which is still high; albeit with slight moderation. In the coming months, the spillovers from global commodity and food prices would continue to add stress to domestic prices. We thus, do not see India’s inflation cooling down in the near term and in such a scenario maintaining the strength of domestic demand will be crucial from policy perspective," added Vivek Rathi, Director-Research  Knight Frank India.

Late last month, the government announced a series of changes to the tax structure levied on essential commodities and trimmed fuel tax to cushion consumers from rising prices and fight high inflation. 

Meanwhile, the RBI monetary policy committee (MPC), which met from 6-8 June, announced another hike in key interest rate by 50 basis points to 4.90 per cent as inflation continues to remain above its comfort level.

RBI Governor Shaktikanta Das had already indicated that there may be another hike in the repo rate though he refrained from quantifying it. 

Further, Das also said that the MPC has unanimously decided to keep the policy stance of ‘withdrawal of accommodation’.