India’s Retail Inflation Falls To Fresh Low Of 2.18% In May

India’s retail inflation gauge fell further in May after hitting a record low in the previous month, leaving lingering doubts about whether the Reserve Bank of India (RBI) tightened its monetary policy stance too soon.

Consumer price inflation slowed to 2.18 percent in May from 2.99 percent in April, data from the Ministry of Statistics and Programme Implementation showed. A Bloomberg poll of economists had pegged retail inflation at 2.4 percent.

The consumer food price index declined 1.05 percent in May compared to a year ago led by an almost 20 percent fall in the prices of pulses and products. Price of vegetables too fell 13.4 percent from a year ago.

The declining trend in inflation began in March, taking most, including the central bank, by surprise. The RBI, in its bi-monthly monetary policy review, cut its headline inflation projection to 2-3.5 percent for the first half of FY18 compared to 4-4.5 percent earlier. Despite this the central bank left the benchmark interest rates unchanged, although it softened its stance to say that risks to inflation are now evenly balanced. The central bank also said it may consider ‘broader policy accomodation’ should the data warrant it.

The RBI will not be able to hold on a rate cut any longer, said Soumya Kanti Ghosh, chief economic adviser of State Bank of India, in a note following the release of inflation data.

Ghosh expects inflation to remain below the 2 percent level in the next couple of months before moving up. However, he estimates it will stay below the 4 percent mark at least till November.

Among the food and beverages category, with the exception of vegetables and pulses, most categories saw positive but declining inflation.

• Prices of cereals and products increased 4.81 percent compared to 5.06 percent in April
• Prices of milk and dairy products rose 4.5 percent compared to 4.74 percent in April
• Inflation in oils and fats stood climbed 2.7 percent compared to 3.4 percent last month
• Sugar and confectionary prices rose 9.8 percent compared to over 11 percent last month.

In the core inflation categories, the housing and clothing segments saw a steady trend. Housing inflation was at 4.84 percent in May compared to 4.86 percent in April. Clothing and footware inflation stood at 4.41 percent compared to 4.58 percent. Inflation in the health and household services segment also declined marginally.

While headline inflation has fallen faster, core inflation has also started to ease possibly due to the decline in growth. Should this continue, the RBI may consider cutting its benchmark interest rate in August, say some economists.

“...If the monthly inflation momentum moves closer to the lower end of the RBI’s projected path, then a rate cut cannot be ruled out,” wrote Abheek Barua, chief economist at HDFC Bank in a report on June 8.