• HDFC
• 24 Aug 2018
• Knowledge Centre

HDFC, Tester

Retail inflation, measured by the Consumer Price Index, came in at 4.17% in July 2018, as against 4.92% in June 2018, according to data released by the Central Statistical Organisation.

 

Consumer inflation was above the Reserve Bank of India's (RBI) medium-term target of 4% for the ninth consecutive month. A daily quoted D K Joshi, Chief Economist, CRISIL Research as saying, “Lower food and core inflation are factors that brought the headline CPI inflation number down in July 2018. The sustained rise in core inflation seen till June 2018 was the main reason for the RBI’s Monetary Policy Committee hiking its policy rate twice.”

 

Consecutive Rate Hikes

 

The central bank raised its benchmark repo rate by 25 bps (basis points) in two consecutive bi-monthly policy meets in June 2018 and August 2018. These hikes were triggered by high inflation figures, as can be seen in the RBI’s statement released after its June 2018 policy meet. Consumer price inflation came in at 4.87% in May 2018, as compared to 4.58% in April 2018, according to data released by the CSO.

 

At that point, inflation was expected to increase, largely owing to rising international crude oil prices. The central bank’s statement reads - “On the basis of an assessment of the current and evolving macroeconomic situation, the Monetary Policy Committee has decided to increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points to 6.25%.

 

Consequently, the reverse repo rate under the LAF stands adjusted to 6%, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5%. The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4% within a band of +/- 2% while supporting growth.”

 

Based on the Consumer Price Index (CPI), retail inflation for June 2018 was also revised downwards to 4.92% from the earlier estimate of 5%.

 

The Break-up

 

Milk products, meat, and fish reflected an easing of inflation during the month. However, in the case of eggs, cereals and cooking oil, the rate of price rise was higher than that witnessed in June 2018. The CSO data shows that inflation in vegetables declined by (-) 2.19% in the previous month, compared to 7.8% in June 2018. The rate of price rise in fruits slowed 6.98%, as against over 10% in July 2018.

 

The dip in retail inflation has led to the view that the RBI will keep interest rates on hold at its meet in October 2018. “We believe the RBI will put the policy rate on hold unless pressures from higher-than-anticipated upside risks to inflation from crude oil, stronger demand conditions, and food prices materialize,” Mr. Joshi said.