In May, retail inflation eased to 7.04%, but it’s too early to declare a peak

Retail inflation in India fell to 7.04 percent in May from a year earlier, after reaching an eight-year high in April, according to data released on Monday.

The previous peak was 8.33 percent in May 2014, until the consumer price index (CPI) rate of 7.79 percent in April 2022. April’s figure was higher than March’s 6.95 percent and 4.23 percent a year ago.

While May’s figure of 7.04 percent is lower than April’s, it remains considerably beyond the Reserve Bank of India’s (RBI) upper tolerance range for the fifth month in a row.

Food inflation, which makes up roughly half of the CPI basket, was 7.97% in May, down slightly from 8.31 percent in April.

While retail inflation fell in May, prices for a number of food items rose over the month.

Cereals, meat and fish, and vegetables all saw considerable price increases in May compared to April.

“Inflation moderated…but this was driven by a high base from last year. On a sequential basis, inflation continues to gain momentum and signs of broad basing of inflationary pressures remain the worrying bit. We could see inflation remaining above or close to 7 per cent until September,” Sakshi Gupta, Principal Economist at HDFC Bank, told Reuters.

“There are more upside risks to this forecast with oil prices remaining relentless. The RBI is likely to take the repo rate up to 6 per cent by the fiscal year-end, front-loading its rate hikes,” she added.

Price pressures are expected to stay significant and over the central bank’s goal zone of 2-6 percent for the rest of the calendar year, so calling a peak in inflation is premature.

Indeed, the RBI, which uses the CPI to determine monetary policy, boosted its inflation projection for the current financial year to 6.7 percent from 5.7 percent earlier this month.

The government has instructed the central bank to maintain retail inflation at 4%, with a tolerance of plus or minus 2% of that rate, which is between 2% and 6%.

The RBI was compelled to raise its main rate for the first time in four years due to rising inflation expectations, raising it by 40 basis points (bps) in an off-cycle meeting in May and another 50 basis points last week, bringing the repo rate to 4.90 percent.

The repo rate is the rate at which the Reserve Bank of India loans money to commercial banks, and recent inflation data suggests that interest rates will continue to rise.

Further analysis of the current data reveals a significant drop in inflation in rural India, which fell to 7.01 percent in May from 8.38 percent the month before.

The CPI Inflation rate in urban areas fell a smidgeon to 7.08 percent last month, down from 7.09 percent in April.

“May CPI at 7 per cent, coming nearly in-line with our and market expectation of 7.1%, is a relief. It gives inflation watchers a sense that nothing untoward is happening with underlying price pressures,” Prithviraj Srinivas, Chief Economist at Axis Capital, told Reuters.

“The government’s active ring-fencing of external price concerns, as well as the RBI’s gradual removal of stimulus, give reason to believe that inflation will follow the expected path. Headline inflation is likely to remain relatively stable through September, before gradually falling below the 6% upper tolerance band by year’s end “He went on to say.