Retail inflation rises to 6-month high, poses uncertainty for rate cut

The beginning of the financial year 2019-20 saw a bit of rising inflationary pressures, but the rate of price rise was still below the average of the Reserve Bank of India’s (RBI’s) mandate of 2-6 per cent. Experts are divided whether the monetary policy committee (MPC) of the RBI will cut the policy rate in June.

The retail price inflation rose to a six-month high of 2.92 per cent in April, pushed up by costlier food items. However, food inflation was still 1.1 per cent in the month against 0.3 per cent in the previous month.

It was in March that food inflation broke the five-month trend of deflation. This may augur well for farmers who faced rural distress.

Inflation in urban areas rose to 4.64 per cent in April from 3.47 per cent in the previous month, which may not go down well with the middle class, if the trend persists.

Much of the inflation in food items is generally attributed to the government’s recent move to give higher minimum support price (MSP) to farmers. However, the two important items where the support is given — pulses and cereals — did not see much pressure.

Pulses still faced deflation in April at 0.89 per cent, though the rate declined from 2.25 per cent in March. Cereals and products saw inflation falling to 1.17 per cent from 1.25 per cent over the period. 

Vegetables came out of deflation of 1.49 per cent in March to inflation of 2.87 per cent in April. “Vegetable inflation will increase in the summer months,” said Madan Sabnavis, chief economist at CARE Ratings.

Rajni Thakur, economist with RBL Bank, said lower than expected pick up in food prices will ensure that inflation will likely remain below the central bank’s target well into the second half of the current financial year.

Among non-food items, clothing, footwear, rent and household services saw a decline in inflation.

But, fuel and light witnessed a rise in inflation to 2.56 per cent in April from 2.42 per cent the previous month.

At the outset, it seems that MPC might go for rate cut with the index of industrial production (IIP) contracting in March and inflation still within its mandate.

However, some economists believe that any such move would be put off.

“We believe this (rate cut) will be deferred because the monsoon pattern needs to be understood better, the new government’s fiscal stance and deficit implications would have a bearing on potential demand side inflation and oil price impact would take shape in the next few months,” said Sabnavis.

India Meteorological Department (IMD) recently predicted the monsoon to be normal in this season. Thakur, however, said, “The case for further rate cuts along with additional liquidity measures just got stronger.”