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Seasonal “forces” pinned down consumer price index (CPI) inflation in July as it rose 4.17% compared with 2.36% in the same month last year.

After rising to a five-month high of 4.9% in June, the CPI inflation eased 73 basis point (bps) in July mainly on softer fruit and vegetables. Structural “forces” like crude, petroleum and others continued to keep the upward pressure on headline CPI inflation.

D K Srivastava, chief policy advisor, EY India, said once the influence of the seasonal factors subsides the inflation could jump back closer to 5%, farther from Reserve Bank of India’s (RBI) target of 4%. This, he said, could happen around September-October.

“It appears to be an influence dominated by seasonal factors. Once these factors subside, we may then see inflation coming closer to 5%. It would be around September-October when the spending season starts,” he said.

CPI inflationAs per the figures put out by the Central Statistics Office (CSO) on Monday, food inflation was 1.3% last month compared with 2.9% in June while the fuel and light inflation remained elevated at 7.96% compared with 7.14% in the previous month. Housing inflation also saw a marginal uptick at 8.3% compared with 8.45% in June.

“We can distinguish between the two types of forces; one is the underlined structural force that is keeping the inflation rate up such as crude, petroleum and so on; they are still elevated and will remain elevated. There are some seasonal factors such as vegetable prices, which are now in the negative range,” said Srivastava.

In July, vegetable prices fell 2.20% compared with the same month last year.

Aditi Nayar, vice president and senior economist, Icra Ltd, said surprises in some of the items in the CPI basket contributed to a “substantial correction” in the headline CPI inflation last month.

“Despite the truckers’ strike, food inflation eased considerably in July 2018, benefitting from the base effect.

Like Srivastava, she sees factors weighing “against the correction”.

“Prices of various vegetables, milk, sugar, some edible oils and some pulses have undergone a modest uptick so far in August 2018. Even as the monsoon deficit has worsened in the current month, kharif sowing has picked up the pace, narrowing the gap relative to the area covered last year. Nevertheless, the area covered under rice, coarse cereals, pulses and cotton continues to lag year-ago levels. The out-turn of rainfall in the remainder of the monsoon season will be vital for supporting timely sowing and eventual yields,” she cautioned.

The EY economist also believes that if the scare of deficient monsoon comes true then it could possibly shrink food supply, which could improve farm income but put pressure on food prices and lift the inflation in coming months.

Srivastava sees the impact of minimum support price (MSP) revision on inflation playing out towards the later part of the current fiscal.

Devendra Pant, chief economist and senior director (public finance), India Ratings and Research (Fitch Group), expects food inflation to remain low for next two months before it gets impacted by revision MSP.

“Internally, food inflation moderated to a 10-month low and is expected to behave at this pace for next two months before the impact of revision of kharif MSP starts impacting inflation,” he said.

Pant said the high year-on-year (yoy) fuel prices had led to a continuous increase in inflation of fuel and light and transport and communication group; “going forward these commodity groups are expected to exert pressure on retail inflation”.

Nayar said the core-core –- non-food, non-fuel and non-transport and communication –- inflation, which had moderated to a four-month low at 5.70%, was still higher than the core-core inflation observed between March 2016 and March 2018, suggesting demand pressure in the economy.

“Sharp decline in retail inflation to 4.17%, closer to RBI’s 4% inflation target will give a lot of comfort to monetary authorities and we expect RBI to stay in pause mode in rest of FY19,” she said.

Nayar also expects the sustained depreciation of rupee against the dollar to feed into the CPI inflation over near term.

“Crude oil prices continue to display a volatile trend, driven by geopolitical risks and concerns regarding supply as well as demand in various parts of the world. The CPI inflation in Q2 FY2019 looks set to lag the MPC’s estimate of 4.6%, reducing the likelihood of a rate hike in the October 2018 policy review,” she said in a statement issued by Icra.


  • Economists say the downward trend in the inflation last month was driven by seasonal forces  
  • Once their effect wears out, it could jump back closer to 5%. Structural forces continued to keep inflation elevated

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