India's retail inflation eases further to 5.3% in August

Inflation is within RBI's 2%-6% comfort range for a second month. But it has been above the medium-term target of 4% for nearly two years

The retail inflation based on the Consumer Price Index (CPI) was 5.59% in July and 6.69% in August 2020. As per the data released by the National Statistical Office (NSO), inflation in the food basket was 3.11% in August compared to 3.96% in the preceding month.

Inflation is within RBI's 2%-6% comfort range for a second month. But it has been above the medium-term target of 4% for nearly two years. "The Price data are collected from representative and selected 1114 urban Markets and 1181 villages covering all States/UTs through personal visits by field staff of Field Operations Division of NSO, MoSPI on a weekly roster. During the month of August 2021, NSO collected prices from 99.7% villages and 98.6% urbanMarkets while the Market-wise prices reported therein were 87.1% for rural and 87.4% for urban," said Ministry of Statistics & Programme Implementation in a statement.

Last month, the central bank held its monetary policy loose, but cited concerns about inflationary pressures on the economy. The RBI has projected the CPI inflation at 5.7% during 2021-22 -- 5.9% in the second quarter, 5.3% in third, and 5.8% in the fourth quarter of the fiscal, with risks broadly balanced. CPI inflation for Q1 2022-23 is projected at 5.1%.

"Inflation surprised on the downside in August compared to consensus expectations. The softness was led by lower food inflation, especially in cereals, sugar and vegetable categories. Core inflation also dropped below 6% after remaining elevated for the last few months. Fuel inflation continued to play spoilsport at almost 13% in the month. Inflation readings could remain contained for the next 2-3 months, in part supported by a high base, before inching up to 6% from December onwards. For now, the sub-6% print for a second consecutive month is likely to take the pressure off the RBI to normalise liquidity just yet. "We expect the central bank to start discussing any liquidity rollback only by the beginning of 2022," Sakshi Gupta, senior economist, HDFC Bank told Reuters.

"With the August print of 5.3%, CPI (consumer price index)inflation has moved further down from its peak of 6.3% in May and June, aided by softer prices of food and beverages and base effects. Core inflation remains elevated at 5.8% y/y in August and an average of 5.9% FYTD (financial year to date), but signs of a sustainable demand recovery apart from supply-side factors continue to remain important. "The extent of manifestation of sequentially softer cereal and vegetable prices (based on available real-time data so far in September) in official CPI, sectoral supply adjustments, commodity prices, services inflation, etc. will be crucial ahead," Sreejith Balasubramanian, economist-fund management, IDFC AMC told Reuters.

Despite the devastation of the second wave of the coronavirus, India's economy grew at its fastest ever rate in the June quarter, supported by a low base of a record contraction a year earlier and a strong rebound in manufacturing.

The RBI also kept its growth forecast at 9.5% for this fiscal year.