Retail inflation for May softens to 7.04% but remains above RBI’s 6 % goal for fifth straight month

India's headline retail inflation rate eased to 7.04 percent in May, much lower than the eight-year high of 7.79% in April. Data released by the Ministry of Statistics and Programme Implementation on Monday showed that the Consumer Price Index or retail food inflation remained above the upper band of the Reserve Bank of India (RBI) target for the fifth month in a row, since January 2022.

The previous high recorded was 8.33 percent in May 2014. April 2022 print was higher than 6.95 percent in March and 4.23 percent a year ago. The latest inflation for May of 7.04 percent though below April's figure it has remained well above RBI's upper tolerance limit.

Data showed that food inflation for May 2022 stood at 7.97 percent, slipping slightly from 8.31 percent in April. Prices of cereals, meat, fish, and vegetables saw a significant rise in May compared to April 2022.

While rural inflation for May was at 7.01 percent down from 8.38% in April, urban inflation recorded 7.08 percent versus 7.09 percent the previous month. And although inflation dropped sharply by 75 basis points between April and May, all six major groups of the CPI basket - food and beverages, pan, tobacco, and intoxicants, clothing and footwear, housing, fuel and light, and miscellaneous registered a sequential increase in their respective indices.

Economists noted that the RBI had last week projected price pressures to remain elevated and over its target band of 2-6 percent for the rest of this calendar year, and thus would be too early to call a peak in inflation. The RBI, which factors the CPI in its monetary policy, had earlier this month raised the inflation forecast for the current financial year to 6.7 percent from its previous estimate of 5.7 percent.

The government mandates require the RBI to keep retail inflation at 4 percent, with a tolerance level of plus or minus 2 percent of that rate, which is between 2 and 6 percent. As the outlook of inflation went up, the RBI was forced to hike its key rate for the first time in four years, lifting it by 40 basis points (bps) in an off-cycle meeting in May and a follow-up 50 basis points increase last week, taking the repo rate to 4.90 percent.

As per the data, the oil inflation is up 1.50 percent month on month, with the most aggressive rise taking place last month. The rise has been attributed to the Russia-Ukraine conflict and sunflower other oils getting expensive. However, with Indonesia resuming the export of Palmolein oil, ease in oil prices has been noticed.

While the housing index is up 0.4 percent, footwear went up 1 percent and the fuel index went up 1.4 percent.

Analysts termed the numbers as being definitely softer than their expectations of 7.17 percent or more. “But much heartening is the fact that the sequential momentum month-on-month is at 0.9 percent and much lower than our expectations of 1.1 percent. At the margin it impacts sentiments offering relief or respite however short that might be,” an analyst said looking at the numbers and adding that the risk of food inflation still remains.

Observers say that they believe that June numbers could still be above 7 percent given that vegetable prices can be erratic and with the currency that is depreciating the imports, costs could be higher.

Sharing his thoughts, a banker observed that the low inflation numbers for May actually don’t change the expectations much. “We are expecting another 50-basis point hike in the next meeting of the Monetary Policy Committee. But that puts us beyond the pre-COVID level. My senses are that after that we pause for at least one meeting to reassess the path towards the real rate. And then I think by the end of the year, you're looking at the 5.9 to 6 percent on the record,” the banker said.