India Ratings and Research (Ind-Ra) believes the Reserve Bank of India (RBI) will continue with its accommodative monetary policy stance till end of 2021 as the recent easing of commodity prices would relieve the pressure on the retail inflation in coming months. The price build-up in global commodities, especially for those whose prices are a pass through into the domestic market, had put significant pressure on both retail and wholesale inflation since January 2021. However, there are some indications of easing in their prices now.
Moreover, the southwest monsoon, which had been weak in the first half of July, gathered pace in the latter half with the rainfall being only 2% below normal till July 28, 2021.The Monetary Policy Committee of RBI will conduct their third bi-monthly review during 4-6 August 2021. The committee has maintained a dovish stance for six times in a row till its last meeting, despite retail inflation remaining outside of the comfort zone during April-November 2020 and May-June 2021. The retail inflation, after remaining somewhat subdued during December 2020 and April 2021, has again flared up and was in excess of 6.0% both in May and June 2021.
The big difference in retail inflation this fiscal vis-à-vis last fiscal is the base effect. While the retail inflation last year was on a low base, this year it is on a high base. This indicates that price rises have not only been steady but also gathered momentum lately. The elevated inflation at the time of weak demand conditions suggests either supply-side issues or inability of manufacturers to absorb rising input costs, or both.
In its second bi-monthly review, the RBI had projected retail inflation to come in at 5.1% in FY22 with risks broadly balanced. The RBI expects that a decline in rate of infections, restrictions and localised lockdowns across states could gradually ease and mitigate disruptions to supply chains, thus reducing cost pressures. Also, the weak demand conditions may temper the pass-through to the core inflation.
Despite the spike in retail inflation, the RBI has chosen to continue with its accommodative policy perhaps, due to (i) growth concerns and (ii) its expectation that the retail inflation would moderate in the coming months. The recent monthly inflation numbers released by the National Statistical Organisation (NSO) for June 2021 remained unchanged at 6.3%, despite the unfavourable base effect. In fact, the momentum effect (changes in prices in the recent months driving current inflation) has gathered pace, with the quarterly inflation rising to 5.6% in 1QFY22 from 4.9% in 4QFY21. The 70bp surge was broad-based with the core inflation edging to the level of 6.0% and fuel and light breaching 10%. The fuel and light inflation came in at 12.7% in June 2021, the highest level in the 2011-12 series.
Besides higher global crude oil prices, the elevated indirect taxes have put fuel prices on fire. The core inflation has been on an upward trajectory since 4QFY20, reaching an 11-quarter high and contributing 50.3% to the headline inflation in 1QFY22.The food and beverages inflation increased to 4.5% in 1QFY22 from 4.0% in 4QFY21. This was largely due to the surge in the prices of oils and fats, and fruits. The inflation of oils and fats, which has been consistently picking up since 1QFY20, touched a record high of 30.5% in 1QFY22. Similarly, the fruits inflation at 11.1% reached a 26-quarter high in 1QFY22.
Among the various segments of the core inflation, transport and communication (on the back of the high retail prices of diesel and petrol) contributed 15.7% and health inflation contributed 8.4% to the retail inflation in 1QFY22. The transport & communication inflation ascended to a new high of 11.58% in the 2011-12 series. The health inflation which has been on a persistent rise since 1QFY21 reached 7.95% in 1QFY22 due to the catastrophic impact of COVID-19. The other two segments of core inflation namely housing and clothing contributed 7.0% and 5.1% to the retail inflation in 1QFY22.
