The Reserve Bank of India (RBI) will continue with its accommodative monetary policy stance till end of 2021 as the recent easing of commodity prices would relieve the pressure on the retail inflation in coming months, says India Ratings and Research (Ind-Ra).
In a note, the ratings agency says, "The price build-up in global commodities, especially for those whose prices are a pass through into the domestic market, had put significant pressure on both retail and wholesale inflation since January 2021. However, there are some indications of easing in their prices now. Moreover, the southwest monsoon, which had been weak in the first half of July, gathered pace in the latter half with the rainfall being only 2% below normal till 28 July 2021."
The monetary policy committee (MPC) of RBI will conduct their third bi-monthly review during 4-6 August 2021. The MPC has maintained a dovish stance for six times in a row till its last meeting, despite retail inflation remaining outside of the comfort zone during April-November 2020 and May-June 2021.
The retail inflation, after remaining somewhat subdued during December 2020 and April 2021, has again flared up and was in excess of 6.0% both in May and June 2021. The big difference in retail inflation this fiscal vis-à-vis last fiscal is the base effect.
"While the retail inflation last year was on a low base, this year it is on a high base. This indicates that price rises have not only been steady but also gathered momentum lately. The elevated inflation at the time of weak demand conditions suggests either supply-side issues or inability of manufacturers to absorb rising input costs, or both," Ind-Ra says.
In its second bi-monthly review, RBI had projected retail inflation to come in at 5.1% in FY21-22 with risks broadly balanced. RBI expects that a decline in rate of infections, restrictions and localised lock-downs across states could gradually ease and mitigate disruptions to supply chains, thus reducing cost pressures.
Also, Ind-Ra says the weak demand conditions may temper the pass-through to the core inflation. Despite the spike in retail inflation, RBI has chosen to continue with its accommodative policy perhaps due to growth concerns and its expectation that the retail inflation would moderate in the coming months.
The recent monthly inflation numbers released by the National Statistical Organisation (NSO) for June 2021 remained unchanged at 6.3%, despite the unfavourable base effect. In fact, the momentum effect (changes in prices in the recent months driving current inflation) has gathered pace, with the quarterly inflation rising to 5.6% during first quarter (1Q) of FY21-22 from 4.9% in Q4FY20-21.
Ind-Ra says, "The 70 basis points (bp) surge was broad-based with the core inflation edging to the level of 6.0% and fuel and light breaching 10%. The fuel and light inflation came in at 12.7% in June 2021, the highest level in the 2011-12 series. Besides higher global crude oil prices, the elevated indirect taxes have put fuel prices on fire. The core inflation has been on an upward trajectory since Q4FY19-20, reaching an 11-quarter high and contributing 50.3% to the headline inflation in Q1FY21-22."
During the first quarter of FY21-22, food and beverages inflation increased to 4.5% from 4.0% in Q4FY20-21. "This was largely due to the surge in the prices of oils and fats, and fruits. The inflation of oils and fats, which has been consistently picking up since Q1FY19-20, touched a record high of 30.5% in Q1FY21-22. Similarly, the fruits inflation at 11.1% reached a 26-quarter high in Q1FY21-22," the ratings agency says.
Among the various segments of the core inflation, transport and communication (due to high retail prices of diesel and petrol) contributed 15.7% and health inflation contributed 8.4% to the retail inflation in Q1FY21-22.
The transport and communication inflation ascended to a new high of 11.58% in the 2011-12 series. The health inflation, which has been on a persistent rise since Q1FY20-21, reached 7.95% in Q1FY21-22 due to the catastrophic impact of COVID-19. The other two segments of core inflation, namely, housing and clothing contributed 7.0% and 5.1% to the retail inflation in Q1FY21-22, the ratings agency added.