In May, CPI inflation was 7.04%, which was in line with Expectations

Despite the fact that inflation decreased in May, it has now been above the medium-term target of 4% for 32 months and five months in a row above the 6% upper-bound of the 2-6% tolerance range.

According to data released on June 13 by the Ministry of Statistics and Programme Implementation, India’s headline retail inflation rate fell to 7.04 % in May from a near-eight-year high of 7.79% in April, mainly to a favourable base impact.

The most recent inflation reading is in line with expectations. Consumer Price Index (CPI) inflation fell to 7.1% in May, according to a Moneycontrol poll.

The Reserve Bank of India’s (RBI) rate hike cycle is unlikely to be slowed by the drop in inflation in May.

For the 32nd month in a row, CPI inflation has exceeded the RBI’s medium-term objective of 4%. Worse, it has now been above the 6% upper bound of the 2-6% acceptable zone for five months.

The Monetary Policy Committee (MPC) is on course to miss its mandate in October, when CPI data for September is announced, according to the central bank’s latest prediction.

When average CPI inflation exceeds the 2-6% tolerance band for three consecutive quarters, the MPC is considered to have failed. With inflation averaging 6.3% in January-March, the RBI’s forecasts of 7.5% in April-June and 7.4% in July-September, if they hold, will see the economy fail by October.

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Internals in May

Despite the fact that inflation fell by 75 basis points in May compared to April, all six key groups of the CPI basket – food and beverages, nicotine and intoxicants, apparel and footwear, housing, fuel and light, and miscellaneous – saw their indices rise sequentially.

Food index7.97%1.6%
  Meat, fish8.23%2.5%
  Oils, fats13.26%1.5%
Clothing, footwear8.85%1.0%
Fuel, light9.54%1.4%
CPI inflation

The two most variable components, food and fuel, saw the biggest month-over-month increases.

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While the food and beverage index increased by 1.5% month over month in May, the fuel and light index increased by 1.4% from April.

Both price hikes were in line with expectations. Due to the heat wave, shortages, and increased input costs, food prices surged in May, particularly for grains, meat and fish, edible oils, and vegetables.

Only three of the 22 food categories for which the Department of Consumer Affairs collects statistics experienced price drops month over month in May.

Meanwhile, the impact of the May 21 excise duty drop for gasoline and diesel is expected to be seen in June inflation figures.

Despite these increasing forces, inflation fell in May due to an extraordinarily favourable base effect.

The general index of the CPI was 160.4 in May 2021, up 1.6% from 157.8 in April 2021. This was a far cry from the index’s 0.9% gain previous month, which helped to keep inflation in check.

Core inflation, which excludes food and fuel, was also pulled down by the base impact. This measure of inflation, which is used as a gauge of the economy’s underlying demand, fell to 6.2% in May from 7.0% in April.

Policy in the future

So far in FY23, the RBI has raised the repo rate by 90 basis points to 4.90%. Economists expect the policy rate to rise further in the coming sessions, with the key rate hovering around 5.5-6.0% by the end of the fiscal year.

With the central bank maintaining its GDP growth forecast for FY23 at 7.2% on June 8, the rate hi

Akes are certain to have an impact on growth, albeit with a lag.

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