At a 10-month low of 3.69% in Aug, retail inflation below RBI target

The base-effect led to a fall in housing inflation to a nine-month low of 7.59% in August
The consumer price index (CPI) inflation rate fell to a 10-month low of 3.69 per cent in August as food prices declined at a steeper rate in urban areas compared to July and remained almost flat in rural areas. 

However, fuel inflation rose in August due to higher international crude prices. 

Food items play a key role in the CPI inflation as these have over 45 per cent weight in the index. The cut in the rates of the goods and services tax (GST) on over 100 items from July 27 also pulled down the inflation. 

The core inflation exhibited across the board also declined to 5.9 per cent in August from 6.3 per cent in July.

However, fuel and light inflation rose to 8.47 per cent in August from 7.96 per cent in the previous month. 

The base-effect led to a fall in housing inflation to a nine-month low of 7.59 per cent in August. 

Going forward, economists said the looming impact of revised minimum support prices (MSPs), surge in crude oil prices and sharp weakening of the rupee against the dollar would push up the inflation in the second half, a risk that may weigh in the minds of the Reserve Bank of India (RBI) in its policy review next month. 

“On a balance, the scales appear tipped towards a third consecutive rate hike in the October 2018 policy review, along with a change in stance to withdrawal of accommodation, unless crude oil prices and the rupee record an appreciable reversal in the intervening period. However, the decision to hike the repo rate in October 2018 is unlikely to be unanimous,” said Aditi Nayar, principal economist at ICRA said.

However, Devendra Pant, chief economist at India Ratings, said a robust GDP growth in the first quarter coupled with declining inflation trajectory should make the RBI optimistic about the economy and hold on the policy rate in the forthcoming policy review in view of two back-to-back hikes. 

However, he also believed that there may possibility be another rate hike this financial year. 

Food inflation declined to 0.29 per cent in August from 1.30 per cent in the previous month. Food prices continued to fall in urban areas. The deflation here increased to 1.21 per cent from 0.36 per cent in these months. 

In rural areas also, food inflation declined substantially to 1.22 per cent from 2.18 per cent in the previous period. Food prices represented another problem in the Indian economy — rural distress. The government’s decision on procurement prices may help the rural distress a bit. 

Prices of vegetables, pulses, sugar continued to indicate deflation in August.