Retail inflation rises to 6.07%, crosses RBI-recommended level


Retail inflation rise to 6.07% in the month of July up from 5.77% in June, data released by the government showed on Friday. According to The Indian Express, this is the highest in nearly two years and well above the Reserve Bank of India’s target of 4%. It even crosses the RBI’s recommended upper limit of 6%. Industrial output also fell by nearly half, coming down to 2.1% in June.

It is the fourth straight reading above the RBI’s target of 5 percent by March 2017. At his last monetary policy review on Tuesday, central bank chief Raghuram Rajan left key interest rates unchanged, flagging upside risks to the inflation target.

The former International Monetary Fund chief economist is due to step down as RBI governor on Sept. 4, after a three-year term, to return to academia. While Prime Minister Narendra Modi’s government has yet to pick a successor, it has bound the next governor with Rajan’s retail inflation target of 4 percent, with a band of 2 percent on either side, for the next five years. Retail food prices surged 8.35 percent year-on-year last month, much faster than a 7.79 percent annual increase in June. Above-average monsoon rains this summer have raised hopes of a boost to farm output and an ensuing drop in food inflation. Already, there are signs vegetable prices are edging down. However, the outlook for core inflation remains uncertain due to a shrinking output gap and an expected pickup in demand-driven price pressures, following full implementation of a major hike in government salaries and pensions. Pay hikes are also expected to make it tougher for Finance Minister Arun Jaitley achieves the fiscal deficit target of 3.5 percent of GDP in the current fiscal year. Jaitley told lawmakers on Friday he would need more money to cover the payout. A looser fiscal stance could boost inflationary expectations, economists warn, as the government pays higher wages and keeps capital investment high in the hope that private sector activity will then pick up. “The central bank faces a difficult task in meeting its inflation targets,” said Shilan Shah, India economist at Capital Economics. Demand push from higher salaries to government employees could also lift inflation.
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Economists though saw no reason for panic attributing the spike partly to the base effect of low inflation last year, and pinning hopes on the good monsoon to temper food prices. This year, the country is expecting record production of pulses, the prices of which have gone up steeply, going by higher area under the crop.
No nervousness is warranted out of headline inflation because the base effect has weighed in on numbers,” said Indranil Pan, chief economist at IDFC Bank.
“As for food, pulses stay high but on a more steady state scenario. Sugar and eggs have also been producing some upward surprises.”
Inflation at 6% is not a cause of worry and for any policy action; inflation has to go down for twothree months in a row, said Madan Sabnavis, chief economist at CARE Ratings.
The government recently notified a 4% inflation target with a band of 2 percentage points on either side for the next five years for the proposed monetary policy committee, which will soon take charge of interest setting.
If consumer inflation exceeds these limits for three consecutive quarters, it will be considered a breach and the RBI will have to give reasons and suggest corrective measures.
Sugar and confectionery items were the second largest contributor to retail.

“There is no arrival of any crop in August. That will be seen September onwards. Both retail and food inflation will remain in this range in August also,” Sabnavis said.

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