May CPI inflation complicates the direction of RBI’s monetary policy, say experts

FPJ Web Desk | Updated on: Monday, June 14, 2021, 07:14 PM IST

May CPI inflation complicates the direction of RBI’s monetary policy, say experts | Photo by Syed Shah Hussaini from Pexels
May CPI inflation complicates the direction of RBI’s monetary policy, say experts | Photo by Syed Shah Hussaini from Pexels

Exponential rise in food prices sequentially rocketed India's retail inflation in May as the Consumer Price Index (CPI) increased by over 6.30 percent. According to the data furnished by the National Statistical Office (NSO), the CPI rose by 6.30 percent last month from 4.23 per cent in April.

Region wise, the CPI Urban rose by 6.04 percent last month from 4.71 percent in April. Similarly, the CPI Rural climbed by 6.48 percent in May from 3.75 percent in April.

As per the NSO data, Consumer Food Price Index increased to 5.01 percent last month from a rise of 1.96 per cent in April.

Experts weigh in with their views:

May CPI inflation posted a strong upside surprise, quickening to 6.3 percent y/y to a six-month high, breaching the upper bound of the inflation target range said Radhika Rao, Economist & Senior Vice President, DBS Singapore.

“Inflationary pressures are evident in certain food components (edible oils, protein items), successive increases in retail fuel prices spurred by tax rigidity as well as spurt in core to past 6 percent to 6.6 percent. Besides higher transport, the latter also likely reflects anecdotal signs that selected non-food categories especially medical inputs (medicines etc.) and hospitalisation costs rose this quarter in midst of the second pandemic wave. Core CPI (ex- food, fuel, transport, precious metals) also rose to 5.2 percent y/y vs 4.2 percent in the previous month,” Rao said.

This outcome complicates the direction of monetary policy, Rao said, adding, the RBI is likely to stick with the US Fed’s playbook on opting to pin this spurt on transient cost-push pressures and stay focused on the negative output gap, amidst weak demand impulses and likelihood of soft real wage growth. Policy normalisation expectations are likely to be increasingly priced in as vaccination approaches critical mass in first half of 2022.

“The headline Consumer Price Index (CPI) for India came at record 6 months high at 6.30 percent in May 2021, vs 4.23 percent in April 2021. On a sequential basis, it has shot up by 1.65 percent.

The rise is owing to an all-scale increase in food and beverages (+1.7 percent), clothing and footwear (+2.0 percent), fuel and light (+2.2 percent), other household items (+1.8 percent).

Professor Krupesh Thakkar, CFA, HoD – Financial Markets, ITM B-School said the normal monsoon forecast can provide relief to food products, but to what extent need to be seen.

“Till now, RBI has been citing the cost-push inflation and supply-side disruptions for the higher inflation. However, the doubts would be raised if the persistent excess liquidity is now resulting in another leg of inflation. Perhaps that was the reason, RBI wants to focus on equality in the distribution of this excess liquidity,” he said.

The overall picture might be of some concern now as the CPI is already higher than the RBI’s projected CPI number of 5.2 percent in Q1 FY22. Though early to say, the upside inflation risks might have been already front-loaded than it was projected. Of course, the CPI is within the tolerance limit of 2 percent to 6 percent (+/- 2 percent), one cannot live with higher inflation, Thakkar said.

In a nutshell, we need to watch the next few month’s figures and surely one cannot rebuff any source of inflation. And regulators along with the government will look forward to preventing any generalisation of the price increase. For RBI, it would be testing waters going ahead. However, they will certainly know a bit better than others, he added.

May CPI was above expectation, as the sequential momentum in both core (headline CPI excluding food & beverages, fuel & light) and food categories was much stronger, said Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC. With disinflation in food prices reversing and core momentum turning up again in April itself, the trend was broadly expected to continue in May but the strength and inclusiveness of stronger readings have surprised.

Prices of some categories like cereals actually picked up sequentially versus a fall in real-time prices available. While this reading is for the month which was most disrupted by the second wave, one has to keep tracking input price pressures (seen from the recent WPI core readings as well), their manifestation and the impact on household demand from the second wave, he said.


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Published on: Monday, June 14, 2021, 07:14 PM IST