Retail inflation hits 4-month high of 5.08% in June, leaving room for RBI rate cut

Retail inflation, measured by the Consumer Price Index (CPI), rose to a four-month high of 5.08 per cent in June 2024, led by a 9.36 per cent rise in food inflation due to rising prices of vegetables and pulses. Official data released on Friday shows that this reading for June 2024 is more than the 4.87 percent recorded in the same month last year.

The latest CPI inflation data has strengthened the Reserve Bank of India’s decision to avoid cutting repo rates, despite two MPC members recently suggesting that maintaining high interest rates could hinder economic growth. Is.

In May 2024, CPI inflation hit a 12-month low of 4.75 per cent, despite food inflation remaining high at 8.7 per cent. Retail inflation rate was 4.87 percent.

cause for concern

Rural inflation stood at 5.66 per cent in the month under review (4.78 in June 2023), while urban inflation stood at 4.39 per cent (4.96 per cent). High rural inflation should be a cause of concern for policymakers, as it will impact both consumption and investment growth.

June 2024 is the eighth consecutive month when overall food inflation has been above 8 percent, according to data released by the National Statistical Office (NSO) on Friday.

The latest retail inflation print of more than 5 percent is likely to spook bond markets, although it was largely in line with economists’ forecasts, who had predicted the CPI for June 2024 to fall between 5-5.1 percent.

The latest figures are also a clear indication that the prices of vegetables and pulses are not coming down. Inflation of both vegetables and pulses remained in double digits at 29.3 per cent and 16.1 per cent respectively. Inflation in pulses has been in double digits in each of the last 13 months, while price inflation in vegetables has remained in double digits for eight consecutive months.

RBI Governor Shaktikanta Das on Thursday had said it was too early to talk about a repo rate cut, especially when surveys indicate that the June 2024 CPI print is likely to be around 5 per cent. With the actual print coming in at more than 5 per cent, the data now adds to support for the RBI’s stance of keeping interest rates on hold, economists said.

Bank of Baroda Chief Economist Madan Sabnavis highlighted that the impact of summer was seen in vegetable prices and retail inflation rose mainly due to food inflation, which stood at 9.4 per cent. “Vegetables, fruits, pulses and grains are the major contributors,” he said.

“With inflation crossing 5 per cent, there will be no rate action by the RBI. While the RBI projects inflation to ease below 4 per cent in the second quarter, the progress of the monsoon will determine whether this is sustainable or not,” he said.

RBI expects inflation to return to 4.5 percent in the next quarters. Sabnavis said any rate action could be considered only in October and would largely depend on data.

Aditi Nair, Chief Economist and Head of Research and Outreach, ICRA Ltd, said the rise in headline CPI inflation was mainly due to a surge in food and beverages inflation above 8 per cent amid a sharp sequential rise in vegetable prices.

“Except food and beverages, inflation in all other sub-groups remains below 4.0 per cent in June 2024,” he said.

Core CPI increased marginally to 3.35 per cent in June 2024 from 3.28 per cent in May 2024.

Nair said this was the seventh consecutive print of core inflation below 4.0 per cent, partly benefiting from the lingering effect of softening commodity prices last year.

ICRA is not ruling out a change in RBI stance in October 2024 and a rate cut of 25 bps each in December 2024 and February 2025, followed by an extended pause. This could happen if the food inflation outlook turns out to be decidedly favorable due to a normal monsoon and favorable distribution of rainfall in the remaining monsoon season, and there are no other shocks, global or domestic.