CPI inflation at 9-month low of 4.17%, but the rate setting panel may not uncork the bubbly as yet

After several months of worrisome macroeconomic data and amid a free-falling rupee, finally, there is some good news for the economy on the inflation front. The July retail inflation has come at a nine-month low of 4.17 percent with the decline seen across most segments. Going by the CSO data, inflation in vegetables declined by (-) 2.19 percent in July, compared to 7.8 percent in June. The rate of price rise in fruits slowed down 6.98 percent, as against over 10 percent in the previous month. The inflation in protein-rich items like meat and fish, and also milk was slower in July compared to the previous month. However, inflation in the ‘fuel and light’ segment increased to 7.96 percent from 7.14 in the previous month. This is encouraging given that the sharp fall in July inflation numbers come with food, vegetable prices and pulses exhibiting visibly a sharp drop. [caption id=“attachment_4300199” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] A section of economists expects that if the August print too come at around 4 percent or even below, there is an expectation that the monetary policy committee (MPC) will not be in a tearing hurry to go for another rate hike in the October policy review. The MPC might then wait till early next year to assess other risk factors, mainly the full impact of minimum support prices (MSP), volatile exchange rate scenario and other external factors. But, not everyone subscribes to this view. One worrying factor is that core inflation, or non-food, non-oil manufacturing inflation continues to be high. In July, the figure stood at 5.82 percent and has remained elevated above 5 percent for the last eight months. If this continues, coupled with upside risks from exchange rate and external factors, these are enough reasons for the MPC to effect another rate cut in October itself. In this context, August numbers will be watched closely. “Will the RBI increase rates again? The answer is yes, though the timing will be critical. The base effect will help to keep the number low, but a lot depends on how the non-food items behave. Lower GST rates should help to temper some prices which should come down. Will it be universal? One cannot say,” said rating agency CARE in a note on Monday evening. The MPC is unlikely to derive great comfort from the July inflation numbers alone and lower its guard on the inflation fight. If one looks at the latest monetary policy review, the dominant language was that of caution. “The MPC notes that domestic economic activity has continued to sustain momentum and the output gap has virtually closed. However, uncertainty around domestic inflation needs to be carefully monitored in the coming months,” said the policy statement. The MPC listed the upside risks of inflation; spiking crude oil price, global markets volatility, significant pick-up in household inflation expectations and the full impact of monsoon and so on. Clearly, the rate-setting panel wants to keep inflation on a short leash and more rate hikes are sure to come. (With data support from Kishor Kadam)