With an inflation dip a welcome cushion

With an inflation dip a welcome cushion

Retail inflation in May at 7.04% came off an eight-year high clocked in the previous month, as excise duty cuts on petrol and diesel cooled pump prices, and food inflation slowed down with the announcement of export curbs on wheat and sugar and an enhanced fertiliser subsidy. Inflation based on the consumer price index (CPI) decelerated from 7.79% in April as the consumer food price index rose 7.97% in May against 8.31% in April. Edible oil prices decelerated, although, worryingly, vegetables maintained their upward trajectory. These two groups are major drivers during this phase of elevated food prices. Indices for energy and transport, two other pressure points, clocked slower growth from the prior month.

The outlook for food inflation has improved with a more confident assessment of a normal monsoon, as confirmed by the Indian Meteorological Department (IMD). The kharif acreage is expected to rise, with farmers deploying increased surplus on account of sustained high food prices. This ought to be aided by government efforts to have farmers substitute for crops whose imports are affected by the war in Ukraine, such as edible oil. But the principal source of imported inflation, energy, could offset gains in stabilising food prices through supply-side interventions. The Russia-Ukraine war looks set to drag on, and the Indian crude oil basket, even with a larger component of Russian supply, has peaked at the decade's high of $121 a barrel.

Last week, the Reserve Bank of India (RBI) hiked interest rates for a second time in two months and revised its inflation estimate, also for the second time, to 6.7% from 5.7% for 2022-23. This was mainly because of food prices, and it expects inflation to be in the region of 7.5% till the summer harvest comes in during the October-December quarter, when the rate is projected to decline to 6.2%. This estimate also factors crude oil averaging $105 a barrel for the fiscal year. With this cushion hopefully in place, both the central and state governments have scope for further fuel duty reductions.