May CPI inflation cools down to 7.04% from eight-year high in April

The consumer price index-based (CPI-based) inflation rate for May 2022 cooled from the eight-year high in April and came in at 7.04 per cent on the back of the base effect and cheaper food prices.

It was still the fifth straight month of headline retail inflation being above the Monetary Policy Committee’s (of the Reserve Bank of India, or the RBI) medium-term target of 4 (+/-2) per cent, thus justifying the two recent interest rate hikes by the central bank.

According to the data released by the National Statistical Office, the CPI rate for April was 7.79 per cent. Consumer food price inflation (CFPI) came in at 7.97 in May compared to 8.09 in April. The latest CPI print is slightly lower than the market expectation of 7.1 per cent, according to a poll of 45 economists by news agency Reuters. 

The excise duty cuts for petrol and diesel and duty cuts on other items may have played a part in cooling inflation.

“Besides the base effect, the impact of the lowering of taxes by the Centre earlier did play out to a certain extent to lower inflation. This will also help in the coming months. Food inflation was high with edible oils, spices, and vegetables pushing it up. There is unlikely to be respite anytime soon on these items,” said Madan Sabnavis, chief economist at Bank of Baroda.

Sunil Kumar Sinha, principal economist with India Ratings, said the impact of excise duty reductions (for petrol and diesel) on prices would be felt much faster than the RBI’s rate cut would do, but would be visible only in June and thereafter both through direct and indirect channels.

Last week, the six-member Monetary Policy Committee unanimously voted to increase the benchmark policy rate by 50 basis points, thereby taking the repo rate to 4.90 per cent. While the real GDP growth forecast for FY23 has been retained at 7.2 per cent, the inflation projection for the year has been increased to 6.7 per cent.

The Monetary Policy Committee noted inflation was likely to remain above the upper tolerance threshold of 6 per cent through the first three quarters of FY23.

However, the biggest indicator that inflationary pressures will persist is that crude oil prices continue to be elevated. The Indian crude oil basket, despite having a greater share of Russian supplies, has touched a 10-year high of $121 a barrel.

Globally, benchmark crude oil was still above $118 a barrel, with many expecting sustained levels of $110 plus in the months to come. This week, the United States Federal Reserve is expected to hike rates amid liquidity tightening by central banks around the world.

According to the May CPI data, the rates of price rise for oils and fats continued to be in double-digit territory at 13.26 per cent, because India’s cooking oil needs are mostly imported.

Vegetable inflation was nearly 18.3 per cent, a segment which hurts households the most. Inflation in eggs and pulses and products came down substantially, at -4.6 per cent and -0.46 per cent, respectively. Meat and fish inflation was at 8.23 per cent while that for fuel and light was almost at 10 per cent.

“While the mild dip in food and beverages inflation benefited from a high base, the cooling itself was fairly broad-based across the components,” said Aditi Nayar, chief economist, ICRA.

Nayar said “the double whammy” of the rise in the crude oil prices and rupee depreciation posed upside risks to the June 2022 CPI inflation print.

“We maintain our view that the MPC will increase the policy rate by 35 basis points and 25 basis points, respectively, in the next two policy reviews, followed by a pause,” Nayar said.

Sinha said the agency expected monetary conditions to tighten further in FY23 as the RBI pursued inflation targeting.

“A favourable base effect will start tapering off from June 2022 till November/December 2022, but the impact of duty cuts, the ban on wheat exports, and a normal monsoon may provide some comfort on the inflationary front. We expect retail inflation to remain higher than 7 per cent even in June 2022,” he said.