India's May retail inflation eases amid broadening price pressures

·3-min read
People are reflected in a glass window of a shop at a marketplace in New Delhi

By Manoj Kumar and Aftab Ahmed

NEW DELHI (Reuters) -India's retail inflation eased marginally in May, after touching an eight-year high of 7.79% in April, but remained above the central bank's tolerance band for a fifth month in a row, suggesting it would continue with rate hikes in August.

A surge in crude oil and commodity prices since Russia invaded Ukraine in February has pushed up consumer prices globally, forcing many central banks to raise interest rates to tame inflation.

Consumer price index-based inflation rose 7.04% in May year-on-year, helped by slower increases in food prices, data released by the National Statistics Office showed on Monday.

May's print was marginally lower than the 7.10% forecast by economists in a Reuters poll, after the government cut taxes on petrol and diesel and put export restrictions on food items including wheat and sugar.

The dip in prices was likely to be temporary, economists said, as a heatwave in June has pushed up prices of vegetables, while the government cut estimates of wheat production because of dry spells in northern India.

The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) raised its benchmark repo rate by 50 basis points to 4.90% last week, after a 40 basis points hike in April, while hinting at more rate hikes to come.

Garima Kapoor, economist at Elara Capital, said price pressures were broadening due to rising energy prices and supply-side disruptions.

"The MPC is expected to hike policy repo rate by an additional 60 to 75 basis points this financial year to rein in inflationary pressures," she said.

INFLATIONARY PRESSURES

The RBI has raised its inflation forecast to 6.7% for the 2022/23 year ending in March 2023, and 7.4% for the July-Sept quarter.

The MPC will meet from Aug. 2-4, and is expected to raise rates by 25-50 basis points.

Food inflation, which accounts for nearly half the CPI basket, rose 7.97% year-on-year in May, compared with a revised 8.31% in the previous month - the highest in nearly two years.

A nearly 5% fall in the rupee against the dollar this year has also made imports costlier.

The benchmark 10-years bond yield rose to its highest in more than three years as investor concerns over faster rate increases in the United States resurfaced following U.S. inflation data.

Stock prices tumbled before the release of the inflation data. The benchmark NSE Nifty 50 index fell 2.6%, its lowest level since July 2021%.

Core inflation, excluding volatile food and energy prices was estimated at 6.09%-6.1% in May by three economists, after the data release.

In May, vegetable prices surged 18.26% year-on-year, compared with 15.41% in April, while milk prices were up 5.64% compared with 6.97% in the previous month.

Kunal Kundu, economist at Societe Generale, said Indians should be ready for strong action from the RBI at its next meeting.

"With the price of Indian basket of crude inching close to its Ukraine conflict high and food inflation hovering around 8.0%, we may not have yet heard the last about peak inflation unless oil companies continue to bear the burden of loss," he said.

(Additional reporting by Chris Thomas, Nallur Sethuraman and Rama Venkat in Bengaluru; Editing by Alex Richardson)

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