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India's CPI inflation eases in July on moderation in food and energy prices

Petrochemical industry | 16 Aug 2022 08:10 IST | Polymerupdate.com

After holding on to the uncomfortable level of above 7 percent for three consecutive months till June, India's retail inflation measured by the Consumer Price Index (CPI) eased below this threshold to the lowest in five months to 6.71 percent in July, National Statistical Office (NSO), Under the Ministry of Statistics and Programme Implementation (MoSPI) said on Friday.

The easing of retail inflation is expected to bring relief for the policymakers including the Reserve Bank of India (RBI) and help the central bank to slow down interest rate hikes in the next Monetary Policy Committee (MPC) meeting scheduled on September 30. The CPI, however, continues to remain higher than the RBI's target range of 2-6 percent.

The moderation in the CPI can be attributed to a combination of factors including a continuous decline in the basket of food and energy products. The NSO data showed ease in food inflation at 6.75 percent in July as against 7.75 percent in June. Lower energy costs helped moderation in the transportation cost which eventually pulled down pressures on the price increases of food products.

Upasna Bharadwaj, Chief Economist, Kotak Mahindra Bank, said, "CPI headline inflation moderated in line with our expectations, led largely by food inflation, while the core inflation remains elevated and sticky. We expect CPI inflation to remain above RBI's upper limit of 6 percent until January 2023. With this, RBI may continue the repo rate hike to take the same at 6 percent by the end of 2022, followed by a pause and a shift to neutral policy stance."

In fact, the bulk of the slowdown comes from recession fears, which have lowered global commodity prices, with crude oil in the international benchmark exchange slipping 9 percent in July, hitting the pre-Ukraine crisis level, and below US$ 100 a barrel. Additionally, the Indian government's move to cut taxes on fuels sparked the slowdown in the CPI for July. The government's interventions to reduce import duties and restrictions on wheat exports also helped.

Rajani Sinha, Chief Economist, CareEdge, believes, "The July CPI inflation moderated more than our expectation to a five-month low led by lower food inflation. The slowdown in consumer inflation for the third consecutive month suggests that the inflationary pressures, though elevated, are on a downward trend. Encouragingly, households' inflation expectations also improved in July reflecting the effectiveness of RBI and government's efforts to tame inflation."

She further added, "A downward revision of Q2 FY23 CPI inflation projection to 7.1 percent (earlier 7.4 percent) by the RBI at its August policy meet further confirms that inflation has already peaked and we could expect some easing going forward."

CareEdge projects India's retail inflation for Q2 to remain in line with the RBI at 7.1 percent. The agency expects inflation to be slightly lower than the RBI's projection in Q3 at 6.1 percent and at 5.8 percent in Q4. Economists forecast India's annual average for retail inflation to undershoot RBI's projection of 6.7 percent by nearly 20 basis points. Nevertheless, volatility in the rupee and uneven monsoon distribution continue to pose a risk to the inflation outlook.

In an encouraging sign, the IIP growth print at 12.3 percent continued to show expansion in June 2022, albeit at a slower pace primarily due to some waning of the base effect. The industrial output recorded strong growth of 6.7 percent when compared with the corresponding month of 2019, continuing to show recovery over the pre-pandemic period.

The encouraging trend in IIP has been aided by broad-based progress across all components. The performance of consumer non-durables also improved after having witnessed muted growth in the previous months.

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