Retail inflation hardened to a six-month high in May, joining the rising trend in wholesale inflation that also strengthened to a record, but experts said the Reserve Bank of India (RBI) may tolerate these levels for a while given concerns over growth.
Retail inflation, as measured by the consumer price index (CPI), accelerated to 6.3% in May from 4.23% in April, breaching the upper band of the RBI’s 2-6% range for the first time in six months, data from the statistics office showed.
The wholesale price index (WPI), released separately by the commerce department, showed inflation at 12.94% in May, the highest in the current series with 2011-12 as the base, magnified by the year-earlier low base. WPI inflation was -3.37% in May 2020 and 10.49% in April 2021.
Rising wholesale inflation, increasingly reflected in retail inflation as well, is going to make things difficult for the RBI, said Sunil Kumar Sinha, principal economist, India Ratings. “However, given the growth inflation dynamics, Ind-Ra believes RBI will not be in a hurry to tinker with either the policy rate or its accommodative policy stance,” he said.
In its monetary policy review earlier this month, the central bank had held rates and reaffirmed its accommodative policy as it pared the growth forecast for FY22 by a percentage point to 9.5%.
Most economists now expect the economy to grow at high single digits in FY22 against double-digit estimates at the beginning of the fiscal because of the severe second wave of the pandemic.
“This outcome complicates the direction of monetary policy,” said Radhika Rao, economist, DBS. “However, the RBI is likely to stick with the US Fed’s playbook on opting to pin this spurt on transient cost-push pressures.”
CPI closely watched by RBI
Retail inflation, more closely watched by the RBI, is likely to ease going ahead as lockdowns are lifted and supply constraints ease.
CARE Ratings expects retail inflation at 5-5.5% with an upside bias in FY22.
Food and commodities
Retail inflation was largely driven by food and fuel while at the wholesale level, commodities caused the spike in May. Retail food inflation accelerated to 5.01% from 1.96 % in April, as the price of meat, fish, eggs, oils and fats surged from a year ago. Fuel inflation was 11.58% on higher retail prices of petrol and diesel. Services inflation also rose as health, transport and personal care costs increased during the second wave of the pandemic.
At the wholesale level, fuel inflation rose to 37.6% in May from 20.9% in April while inflation in manufactured items climbed to 10.8% from 9%. Wholesale inflation in food moderated to 4.3% from 4.9%.