Driven by hike in food prices, retail inflation rises to highest since February

In September, all of the top 5 high inflation items were from the food group

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Retail inflation at 7.3 per cent in September—highest since February—driven mainly by hike in prices of food items, in particular, vegetables, has become a growing concern for the Indian economy. In September, all of the top five high inflation items were from the food group. 

Manufactured items and services recorded benign inflation rates. Economic experts point out that the latest inflation rate in India is one of the highest among the G-20 countries. The policy rate is also high when compared with most peers. 

It is expected that the outcome of high inflation, along with low economic growth, will impact the middle class and even worse, the average tax payers. “Until we see a fiscal stimulus that helps in boosting economic growth, the longer the impact of this situation will result in a significant waste of food produced, owing to lack of affordability. This can result in putting the economy in a downward spiral, which is something we all hope doesn’t happen. The September inflation data is above most estimates, the rise in the retail inflation data for the month of September rising above 7 per cent, food inflation above 10 per cent due to supply constraints is a worry,” observed Sanjay Kumar, CEO and MD, Elior India.

Experts have pointed out that the September inflation data is above most estimates and a rise in the retail inflation data for the month of September rising above 7 per cent and food inflation above 10 per cent due to supply constraints is a worry. 

“This is the sixth straight month that retail inflation has been above the 6 per cent mark. The rise in inflation will affect RBI's ability to act on rates as it would like to see it dropping below the 6 per cent mark on a durable basis before taking a decision,” remarked Nish Bhatt, Founder and CEO, Millwood Kane International, an investment consulting firm. 

As per an observation by Anand Rathi, with the softening in core inflation, it is expected that the RBI will maintain the bias for a lower rate and carry out a 25bps rate cut at the next two policy meets. Experts from Anand Rathi state that traditionally, food prices rise between March and October and fall between November and February and so it is expected that this trend will play out this year as well. 

A report by Motilal Oswal Financial Services states that the real GDP will surprise positively in the second quarter of the current financial year and with the core inflation remaining unchanged for the third consecutive month at 5.4 per cent year-on-year in September, it may not be a cause for immediate concern and things will normalise eventually. 

“While the higher headline inflation is scary, it is almost entirely led by vegetables and does not matter for policy at this stage. The inflation number was higher than our expectation of 6.4 per cent and market consensus of 6.9 per cent. Excluding vegetables, CPI (Consumer Price Index) inflation was flat at 6.3 per cent YoY in September. Overall, food inflation came in at 10.7 per cent YoY in September verses 9 per cent a month ago. Though inflation in September looks astonishing, it was driven entirely by higher vegetables inflation. Eventually, as supply shocks disappear, we expect vegetable prices to normalise. Therefore, we believe that the higher inflation led by vegetables does not matter from a monetary policy perspective at this point,” pointed out Nikhil Gupta, Economist--Institutional Equities, Motilal Oswal Financial Services Ltd. 

Market experts have observed that there was also a sharp surge in rural CPI as it surged sharply compared to Urban CPI as the core inflation in urban slowed down compared to an increase in rural inflation.  As per an assessment by Emkay Global Financial Services, the food inflation pressure continued to augment, while core inflation (demand push) eased. Excluding vegetables, CPI inflation slowed down in the last two months. 

As per Emkay, the RBI is likely to maintain its accommodative stance, despite a spike in headline inflation. It believes that the central bank will not cut rates; however, it is likely to continue to infuse liquidity through OMOs (Open market operations) and TLTROs (Targeted Long Term Repo Operations), which is likely to keep a tab on yields and the spreads.

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