Retail price inflation falls to 5-month low of 4.35% in Sept on food prices

Noticeable slide was orchestrated by a fall in prices of vegetables

The Consumer Price Index (CPI)-based inflation rate fell to a five-month low of 4.35 per cent in September, from 5.59 per cent in the previous month, as food prices rose at a significantly lower pace of 0.68 per cent, compared to 3.11 per cent over this period, revealed the official data by the National Statistical Office on Tuesday.

This justified the accommodative stance of the Reserve Bank of India's monetary policy committee (MPC).

A part of the fall in inflation rate can also be explained by the rise in the base effect to 7.27 per cent in September 2020, from 6.69 per cent in the previous month.

However, the inflation rate in fuels rose to 13.63 per cent in September, from 12.94 per cent in the previous month.

Within food items, vegetable prices fell at a much faster rate of 22.47 per cent in September, compared to 11.68 per cent in the previous month.
 
CARE Ratings in a note cautioned that vegetable prices have started moving up sharply of late, which are not getting covered here due to the base effect.

Oils and fats saw inflation rate rising to 34.19 per cent, from 33 per cent in this period.

Also, prices of household goods and services, which include education, personal care and effects, recreation and amusement, health, and transport and communication, rose marginally at 5.92 per cent, against 7.78 per cent during this period. 
 
CARE Ratings said the high inflation of household goods may be a factor when festival demand revives, especially October through December.

Within household services, pent-up demand led to inflation rate in recreation and amusement rising to 7.58 per cent, from 6.48 per cent.

Core inflation, which takes out food and fuel prices, remained elevated at 5.8 per cent in September.

In its policy review last week, the MPC went for a status quo in policy rate and maintained its accommodative stance. It reduced its projections for retail price inflation rate to 5.3 per cent for 2021-22 (FY22), from its earlier prediction of 5.7 per cent. The inflation rate for the first half of the year stood at 5.33 per cent, which means it should fall a bit more if the RBI projections are to come true.

The MPC correctly projected the rate at 5.1 per cent in the second quarter of FY22. It stood at 5.08 per cent in the quarter.

Going forward, the MPC projected the rate to fall to 4.5 per cent in the third quarter and then rise to 5.8 per cent in the fourth quarter of the year.

However, global commodity prices, including those of petroleum, could spoil the party. Monetary policy has little effect on global commodity prices.

Rahul Bajoria, chief India economist at Barclays, said, "Overall, we expect elevated global commodity prices to continue to exert upward pressure on India’s import basket, which, in turn, will gradually spill over into CPI inflation in the months to come."

Rajani Sinha, chief economist at Knight Frank India, said high core and fuel inflation remain a cause for concern. "With global economic growth gaining momentum, there could be further upward pressure on commodity prices and the central bank would be wary of that. However, there is unlikely to be any change in policy rates in the current year,” she said.