India’s retail inflation slipped marginally in May, but remained well above the Reserve Bank of India’s upper tolerance limit for the fifth consecutive month, as lower fuel prices offset a rise in food costs, a Reuters survey found.
But the fall is expected to be temporary and analysts say the RBI is on track to continue raising interest rates.
Late last month, the government announced several changes in the tax structure imposed on essential goods and cut fuel tax to protect consumers from rising prices and fight high inflation.
Although consumer prices are not expected to see the full effect until June, economists say these measures have helped reverse the upward trend in prices.
But a sharp rise in the prices of wheat, tomatoes, potatoes and other vegetables – staple ingredients in every Indian kitchen – will keep inflation high. Due to dry weather and heat wave in North India, crop yields have decreased.
A June 6-9 Reuters poll of 45 economists showed inflation as measured by the consumer price index (CPI) slipped to 7.10% in May from 7.79% in April a year earlier.
Forecasts for the data, at 5:30 pm on June 14, were in the range of 6.70%-8.30%.
ANZ economist Dheeraj Nim said the government’s fuel tax cut prices by about 10% compared to earlier this year.
“However, food inflation is rising rapidly, especially during the summer months starting from May,” he added.
Rising food prices have become a major concern for families already hit by the pandemic.
Food inflation, which accounts for nearly half of the CPI basket, rose 8.38% year-on-year in April, the highest in nearly two years. The depreciation of more than 4% in the rupee against the dollar this year has also made imports costlier.
This means that interest rates are set to continue rising.
After a surprise 40-basis-point hike in an unscheduled meeting in May, the RBI on Wednesday raised its repo rate by another 50 basis points to 4.90% and said inflation remains in its 6% upper tolerance band by December this year. will remain above
“The current pressures are very much supply-side driven. There is really little that the RBI can directly stop it in the short run,” said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics.