Retail inflation at nine month high: Will rate cut happen now?

Retail inflation as measured in the form of CPI (Consumer Price Index) rose for the month of June. This rise reflects a nine month high retail inflation as the inflation data measured the June inflation at 5.4 percent up from 5.01 percent for the month of May.  This climb in inflation to a nine month high in June is due to a jump in food prices. With this data the market has started speculating on the rate cuts by the Reserve Bank of India in its policy meet early next month. Due to disappointing industrial growth numbers for the month of May the probability of rate cuts was high.

"The inflation for June is a nasty surprise," said Soumya Kanti Ghosh, Chief Economic Adviser at State Bank of India. "I do not expect any interest rate cut by the RBI in either August or September." The focus may shift to prices (inflation) from industrial production due to the latest inflation data. Food-price inflation measured by the consumer price index stood at 5.48 percent in June. In May the same food price inflation was 4.8 percent. The prices of vegetables as well as protein rich food items such as meat, fish, egg and pulses rose for the month of June. The prices of clothing and footwear rose by 6.34 per cent in June compared to a rise of 6.1 percent in the month of May. 

In its June policy review, the Central Bank had cut its policy repo rate by a quarter per cent age point but had effectively ruled out more reductions while forecasting inflation to accelerate to 6 per cent by January 2016. The forecast was made keeping in view that the rainfall will be below average. After a spell of good rainfall in June, the monsoon weakened after 25th June and the rainfall was weak thereafter.

According to an Indian Meteorological Department (IMD) official, the monsoon is expected to weaken after 15th July. IMD has forecast deficient monsoon rainfall this year. The areas with the highest rainfall deficit are Gujarat, central Maharashtra, Marathwada, Vidarbha, coastal and north interior Karnataka, Rayalaseema, Bihar and Kerala.

In its last month’s monetary policy review RBI stated that monsoon rainfall was the biggest uncertainty facing the economy. RBI hinted at a pause in further policy easing in previous meet when RBI reduced its policy rate by 25 basis points in its monetary policy.