India’s retail inflation rises marginally to 3.65% in August

New Delhi: India's retail inflation rose to 3.65% in August, slightly higher than 3.6% reported in July, according to data from the Ministry of Statistics and Programme Implementation (MoSPI).

The inflation was within the Reserve Bank of India's (RBI) medium-term target of 2-6%.

Food inflation, a persistent challenge, rose to 5.66% in August from 5.42% reported in July. This was the lowest since June 2023, when it was 4.55%.

Food inflation had risen to 9.36% in June, to 8.69% in May and 8.70% in April.

To be sure, some economists said the fall in inflation could be a one-off. India’s retail inflation has been below the 6% mark since September 2023, remaining within the central bank’s tolerance range of 2-6% for 13 consecutive months.

Core inflation, goods and services excluding the more volatile food and energy prices, makes up nearly 50% of the basket.

A Mint poll of 27 economists had estimated retail inflation at 3.5% in August, around the same levels reported during July, primarily due to the statistical effect of a high base last year.

Elevated food prices

Food prices have remained elevated for over a year and have stayed above 7% from November 2023 to June 2024, primarily due to last year’s uneven and below-normal monsoon rains.

During August, the prices of cereals, meat, fish, milk products, pulses, sugar and confectionery fell sequentially, while prices of eggs, fruits, and vegetables rose during the month.

While the price of clothing fell sequentially during August, the price of footwear rose during the month.

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Among states, Telangana (2.02%), Uttarakhand (2.37%), and Delhi (2.52%) reported the slowest retail inflation during August.

However, Assam, Bihar, Haryana, Kerala, Odisha and Uttar Pradesh witnessed higher-than-average inflation, indicating retail inflation is still considerably high in several states.

Inflation and the RBI

Last month, the Reserve Bank of India (RBI) left the benchmark repo rate unchanged at 6.5%, signalling that interest rate cuts may take a while.

The central bank expects real GDP growth for FY25 at 7.2%, and CPI inflation at 4.5% for the ongoing fiscal year. It last raised the repo rate to 6.5% in February 2023.

Regulating interest rates is a key for the central bank to control inflation. A higher interest rate regime makes borrowing costs more expensive, reducing demand among banks, financial institutions, and the general public, which can, in turn, bring down consumer spending and inflation.

RBI’s medium-term target for CPI inflation is 4% within a band of plus or minus 2%. 

Also Read: No inflation targeting framework is sacrosanct: India’s chief economic adviser

"The slight uptick in August inflation was largely led by surprise on the food prices, while core inflation remained steady. Overall, the 2Q average inflation appears to be lower by ~60bps than RBI’s estimate of 4.4%," said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

"However, we continue to expect full year estimate at 4.5% and hence RBI to remain focussed on inflation over the next few months," Bhardwaj added.

Meanwhile, given benign global conditions and persistent easy liquidity conditions there is high probability of a change in the policy stance to neutral in the upcoming policy, Bhardwaj said.

"India's retail inflation at 3.65% in August 2024, showed little change from the previous month. Recent inflation readings have consistently come in below the projections of the Reserve Bank of India (RBI), indicating a softening trend. Meanwhile, in the US, inflation has hit a three-year low, and with signs of a cooling labour market, a rate cut by the Federal Reserve in September 2024 seems inevitable," said Sujan Hajra, chief economist & executive director, Anand Rathi Shares and Stock Brokers.

Despite this easing of inflationary pressures, lower-than-expected GDP growth for the quarter ending June 2024 and the likelihood of a rate cut by the US Fed, the RBI is expected to maintain its current policy rate for now, he said. 

"However, the central bank’s stance and forward guidance are likely to turn more dovish, signalling potential future easing," Hajra added.