A recent Reuters poll found that India’s retail inflation has decelerated for three continuous months in July, giving the Reserve Bank of India a breather.
The slowing down has brought the statistics back to the central bank’s target range with supply chain disruptions easing and food prices coming down.
The Consumer Price Inflation (CPI) came down+ from 6.26 percent in June to 5.78 percent in July, according to the poll.
Though hardly, this figure brings the inflation print well within the RBI’s tolerance band of 2 percent to 6 percent which is quite above the mid-point.
The Chief Economist of RBL Bank, Rajni Thakur pointed to the substantial decrease in the prices of edible oil and palm oil.
“There’s a material drop in edible oil and palm oil prices after tariff reductions and global oil price volatility has eased as well.
The inflation trajectory will however continue to remain on the upper end of the RBI’s target range for the current quarter given the underlying core pressures,” the economist said.
The poll reflected that seven economists expected inflation at 6 percent or above. While the economic activities have resumed with the supply chain disruption eased and the inflation coming down, RBI is still cautious.
The Reserve Bank of India’s Monetary Policy Committee (MPC) earlier this month raised the forecast for the current fiscal to an average of 5.7 percent.
The Deputy Governor explained the central bank’s stand saying the inflation projection has come down to 5.7 percent after it was projected at 6.2 percent last year.
He was confident that it would gradually ease to 4 percent. “The approach to inflation is not a cold turkey method, where you slam the economy until it goes limp.
It is important to bring that down over time and not immediately,” Shaktikanta Das said.
Radhika Rao, an economist at DBS Bank underlined the sufficient built-in buffer of the Reserve Bank of India to mitigate possible risks with the recent revision.
“The central bank has built-in a sufficient buffer for potential upside risks with this revision which might materialize via demand recovery and service-led inflation,” Rao said.
Although the second wave of the Covid-19 pandemic resulted in state-imposed lockdowns, leading to struggling supply chains, the RBI’s MPC did not raise the key repo rate this month.
The repo rate, as well as the growth estimate, were the key indicators to be retained for the current fiscal year by the central bank.
Chief Economist at IndusInd Bank, Gaurav Kapur said, “the MPC’s confidence in the growth outlook has clearly improved since their June meeting.”
“While a recovery in economic activity is slowly gaining traction from the bottom of May slack remains in the economy and uncertainty around the pandemic is still quite high, even with a gradual improvement in the pace of vaccination between June and July,” Kapur added.