Retail inflation refuses to cool down, prints 7.61% in October

Analysts think that this will put brakes on any further rate cuts soon, even as the MPC has kept its stance accommodative in its last meeting in October
Consumer price index based inflation, or the retail inflation in the economy inched up a bit from the previous month, at 7.61 per cent in October.

The ongoing streak of rising inflation has now continued for fifth consecutive month, and has remained over the comfort level for seven months. The Reserve Bank of India’s rate-setting monetary policy  committee has a mandate to keep inflation within the 2-6 per cent band. Rural consumer inflation has remained above the upper band for 11 straight months. 

As the economy shows signs of recovery after being battered by the pandemic, rising inflation due to supply constraints comes as a worry, say experts. 

Vegetables inflation stood at 22.5 per cent, that for pulses at 18.3 per cent, as protein rich food remained pricier compared to a year ago even in October. Meat and fish inflation was 18.7 per cent, while that for eggs came in at 21.8 per cent. 

Core inflation, which largely represents the state of demand in the economy, has largely remained in the same range for the last four months. In October 2020, it printed at 5.77 per cent, slightly up from 5.67 per cent in September, and the same as that in August. 

RBI has projected that retail inflation will remain in the range 5.4-4.5 per cent in the second half of FY21, October 2020 to March 2021. But in the first month itself, inflation has shown an uptick instead of moderation. 

Analysts think that this will put brakes on any further rate cuts soon, even as the MPC has kept its stance accommodative in its last meeting in October. 

“Despite the favourable base effect and the abundant kharif harvest, food inflation increased further in October 2020, led by vegetables as well as various other items. However, fresh arrivals in the market may help to cool off prices in the near term,” said Aditi Nayar, principal economist at Icra. 

She said that the possibility of a rate cut in February too looks slim now, as inflation is expected to recede below six per cent only after December, according to her analysis. 

Due to higher taxes on petrol and diesel, and the higher demand for mobile data and broadband as people still largely continue to work from home, inflation in transport and communication stayed elevated at 11.16 per cent.

Madan Sabnavis, chief economist at Care Ratings, said that the continued spike is due to the mismatch between the economicactivity subdued due to Covid-19 and the recovering arm. 

“Inflation has been influenced by both taxes and increased prices as unlocking begins as service providers have increased rates as they have to operate with lower capacity utilisation,” he wrote in a note. 

Inflation from health and recreation and amusement inflation has increased and unlikely to ease in next few months, said Devendra Pant, chief economist at India Ratings. 

“While we expected inflation to decline in Q3 of FY21, it appears that while food inflation may decline with onset of winter and arrival of fresh onion crop, core inflation is likely to remain elevated in FY21,” he said. 

“The phenomenon of food items pushing up overall inflation is getting more generalised now, though the reasons this time are prolonged monsoon and destruction of crops in the Deccan area,” Sabnavis added.

 


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