India’s retail inflation likely accelerated to a seven-month high in May on rising food prices, but it is expected to remain well below the Reserve Bank of India’s target, giving it room to ease policy further, a Reuters poll found.
The RBI changed its stance to accommodative from neutral last week and cut interest rates for the third time in a row, bringing the borrowing rate to a nine-year low of 5.75%.
According to a June 4-7 Reuters poll of over 40 economists, the retail inflation rate rose to 3.01 per cent in May from a year earlier, up from 2.92 per cent in April. Forecasts ranged between 2.83-3.50%.
If the consensus forecast is met, consumer prices will rise at their fastest pace since October, but would still be lower than the central bank’s medium-term target for a 4.0% increase for a tenth consecutive month.
Food prices have steadily risen since March after contracting from October 2018-February 2019. Food prices constitute nearly half of India’s inflation basket.
“The uptick in retail inflation is because of higher vegetable prices,” said Sameer Narang, chief economist at Bank of Baroda.
“Pre-monsoon rains have been delayed and are below normal. It has put sowing a bit behind (schedule) because of which productivity will be low, pushing prices higher.”
In a country where agriculture largely relies on rain instead of irrigation, a weak monsoon can lead to a sharp rise in food prices.
The RBI also highlighted that risk last week and raised its inflation forecasts for the first half of the current fiscal year.
But core inflation, which excludes volatile components like food and energy, has been on a downward trajectory since February, suggesting weakness in economic activity.
In the January-March quarter, India’s economic growth slowed more sharply than expected to 5.8% – lagging China’s pace for the first time in nearly two years – raising the prospect of fiscal stimulus and further policy easing.
“The weaker-than-expected GDP spooked the MPC, with all six members voting to cut. It’s now more than clear that the MPC under Governor Shaktikanta Das cares more about lifting economic growth than keeping strictly to the RBI’s fledging inflation targeting framework,” noted Miguel Chanco, senior Asia economist at Pantheon.
But Vishnu Varathan, an economist at Mizuho Bank, was not convinced interest rate cuts are the only solution when the risk to inflation is skewed to the upside.
“I would be a lot more consoled if one more rate cut is accompanied by a lot of efforts to improve policy transmission rather than cutting and using the knife as the only tool,” he said.