The good news is that CPI inflation fell below 7% in August, and at 6.83%, it printed well below the market’s expectations led by deflation in the prices of vegetables, particularly, tomatoes.

But the bad news is that inflationary pressures shifted from perishable items to others in the food basket like cereals, spices, and pulses, which could prove to be sticky in coming months, much to the concern of the authorities, particularly the Reserve Bank of India.

And the no-so-bad news about the August inflation is that it will not trigger any move from the Monetary Policy Committee of the RBI, which could keep the repo rate steady at 6.5% for the remainder of this financial year.

INFLATION INTERNALS

August CPI inflation was below market expectation of 7%. It, however, is well above the MPC’s target range of 2-6%.

Below are the highlights of August CPI inflation data:

• Vegetable prices fell by 6% month-on-month in August as opposed to a 38% rise between June and July. This led to inflation falling to 6.8% from 7.4% in July.
• Tomato prices, which rose 214.3% on month in July, declined 21.7% in August.
• Prices of meat and eggs fell 1.7% and 3.0%, respectively in August.
• The overall index declined sequentially for the first time in eight months in August. The overall index was down 0.1% on month in August.
• Core inflation, which is inflation excluding volatile food and fuel, fell to 4.8% in August from 4.9% a month ago. This is the lowest level for core inflation in over three years.
• In other words, core inflation is the lowest since the pandemic.
• Core services inflation has remained moderate at 4.5% in August, despite the evidence of strong service sector activities.
• Pressure in cereals, sugar, pulses and spices, kept food inflation at 9.9% year on year in July, versus 11.5% in July.
• Food inflation is still very high and inflation in cereals, as opposed to perishables like tomatoes, tends to be sticky.

Outlook

The MPC is likely to remain cautious about inflation, especially due to monsoon rainfall continuing to be deficient in many parts of the country. The rise in cereals and pulses prices should be a worry as the area under pulses is sharply lower so far this Kharif season.

There are, however, mitigating factors. Pulses are mainly a rabi crop and if rains pick up and reservoir levels remain high, the yield may be adequate to contain the price pressures.

The government as part of its supply-side management has already banned the export of certain types of rice. The MPC will watch how inflation evolves over the next few months and for now, may see through the spurt that started in July.

The RBI will have to revise its quarterly inflation target, given the surge in figures in July. The RBI had projected July-September inflation at 6.2%. The continued fall in vegetable prices and the government's decision to cut LPG prices could bring September inflation closer to 5.5%.

It remains to be seen how the inflation trend emerges till the end of December. If inflation appears to be firm and remains sticky above the MPC’s actual target of 4% going into the next financial year, the MPC may want to act with more interest rate hikes.

For now, it is about waiting and watching and seeing through the spurt in inflation. The RBI members on the committee will sound hawkish but may not propose rate hikes. For the markets, which have already given up hope of a rate cut this financial year, a central bank in a wait-and-watch mode is not so bad an outcome.

The MPC will likely maintain a hawkish pause in October and December.