CPI-based inflation rose to 6.1% in June; food inflation eased to 7.9%

Consumer Price Index (CPI)-based inflation for June stood at 6.09 per cent, slightly above the Reserve Bank of India’s target band of 4 per cent (with a margin of +/- 2 per cent), showed the official data released on Monday. This has raised expectations of another rate cut.

The National Statistical Office (NSO) released the headline CPI numbers after a gap of two months. It had cited difficulty in data collection (due to the lockdown) for the absence of data for April and May. However, it had released the Consumer Food Price Index-based inflation  data for all months.

CFPI for June came in at 7.87 per cent, compared to 9.20 per cent in May, after the food and agriculture supply chain opened up following Unlock 1.0. In June 2019, the CPI stood at 3.18 per cent while food inflation came in at 2.25 per cent. The last time headline CPI inflation breached the MPC’s inflation band was in February 2020, when it came in at 6.58 per cent. For March, it stood at 5.84 per cent.   

The rise in headline CPI figures was mainly on account of the increase in food inflation. It is still above the RBI’s upper band. Any rate cut decision would now depend on growth, which is the bigger concern, rather than inflation. “As Covid-induced restrictions ease and supply crunch reduces, we may see CPI falling below 6 per cent,” said Rahul Gupta, head of research (currency) at Emkay Global Financial Services.

Aditi Nayar, principal economist at ICRA, said the high CPI inflation rate was driven by miscellaneous items, clothing and footwear, as well as tobacco and intoxicants. “Today’s print implies higher retail inflation in June 2020 vis-à-vis March 2020, when the lockdown was imposed, thus challenging the view that demand destruction would cool inflation despite supply-side hiccups,” she said. Nayar said with the monsoon exceeding the long-period average, kharif sowing having spread to above half of last year’s total acreage, and demand from hotels and restaurants remaining subdued, the outlook for food inflation was favourable.

“The MPC will choose to frontload its assessment of the scope for further rate cuts, to support sentiment and hasten transmission. However, this decision is unlikely to be unanimous. We expect an asymmetric cut of 25 bps in the repo rate and 35 bps in the reverse repo rate in the next policy meeting,” she concluded. 

While the NSO had released CPI inflation in absolute and not percentage terms for April and May, they were — by its own admission — inferred for sub-groups for which data could not be collected. As a result, these were not comparable with the April and May 2019 figures.