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Economy 14-Jun, 2024

Retail inflation drops to 12 month low of 4.75% in May; No major change in food inflation as it continues to remain high

By: Team India Tracker

Retail inflation drops to 12 month low of 4.75% in May; No major change in food inflation as it continues to remain high

Image Source: IANS

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026.

India’s retail inflation in the month of May 2024, according to the data released by the Ministry of Statistics and Programme Implementation, dropped to a 12 month low of 4.75 percent. The urban inflation in May 2023 increased to 4.15 percent from 4.11 percent in April. Talking about the inflation in rural areas, it decreased from 5.43 percent in April to 5.28 percent in May 2024. Consumer price index is used in calculating the retail inflation in the economy by tracking the changes in prices of most commonly used goods and services. This means that higher the CPI, higher the inflation which occurs due to the rise in prices of goods and services.

Coming over to the inflation in food prices, there was not much difference in food inflation in May and April 2024. The food inflation just dropped from 8.70 percent in April to 8.69 percent in May. In urban areas, it increased from 8.56 percent in April to 8.83 percent in May 2024. The scenario was opposite in case of the rural areas as the rural food inflation declined to 8.62 percent in May from 8.75 percent in April 2024. This is one of the reasons that the food inflation continues to haunt the RBI. The RBI Governor emphasised that although there has been a gradual decline in inflation since February 2024—from 5.1 percent in February to 4.8 percent in April 2024—food inflation is still high because of ongoing pressures on the prices of vegetables, pulses, cereals, and spices. 
Inflation measured by the Consumer Price Index (CPI) was 4.83 percent in April. The headline rate for the previous month is the lowest since May 2023, when it was 4.31 percent. Since March 2024, the rate has dropped below five percent three times in a row.

According to Emkay Global's lead economist Madhavi Arora, “Core inflation, which excludes volatile components such as food and fuel, is now at an all-time low of 2.97 percent, reflecting some demand imbalances and gaps in the economy.” 

“The headline CPI inflation unexpectedly eased to a 12-month low of 4.75 percent in May 2024 from 4.83 percent in April 2024, as all sub-groups barring fuel and light either witnessed a softening or remained unchanged as compared to the previous month. The better-than-expected reading (ICRA’s forecast: +5.0 percent) was largely driven by a lower-than-anticipated print for the food and beverages group," said Aditi Nayar, Chief Economist, at ICRA.

 
Source: Ministry of Statistics and Programme Implementation

In terms of food, pulse prices increased slightly to 17.14 percent from 16.84 percent in May, although the costs of vegetables decreased slightly to 27.33 percent from 27.80 percent in the previous month. The price of cereals increased month over month as well. Prices for meat and fish dropped significantly from 8.17 percent in April to 7.28 percent last month. Although at a slower rate than a month ago, the fuel and light category's 3.83 percent decrease in May contributed to the headline inflation rate's declining trajectory.

The government has mandated the Reserve Bank of India to maintain the retail inflation at 4 percent with a margin of 2 percent on either side for a five-year period ending March 2026. The CPI is heavily weighted by the RBI while formulating its bi-monthly monetary policy. The repo rate was increased last time on February 08, 2023 by the Monetary Policy Committee (MPC) by 25 basis points (bps), bringing it to 6.50 percent. 

The MPC had increased the benchmark interest rate by 250 basis points in the fiscal year 2022-23 in an effort to control the raging inflation. The RBI increases the repo rate as a measure of tight monetary policy to counter inflation. Repo rate is the interest rate at which the central bank of a country lends money to commercial banks. In the event of inflation, central banks increase repo rate as this restricts the commercial banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in reducing inflation.

In its most recent Monetary Policy Committee Meeting held on June 7, 2024, the Reserve Bank of India decided to keep the repo rate unchanged at 6.50 percent for the eighth time in a row. “These decisions are in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent while supporting growth,” Reserve Bank of India (RBI) governor Shaktikanta Das said after the meeting. 

The MPC reports that in 2024–2025, high frequency indicators of domestic activity are exhibiting resilience. Although an above-average south-west monsoon is predicted, which is good news for rural and agricultural demand, the forecast is vulnerable to headwinds from geopolitical tensions, fluctuations in global commodity prices, and geoeconomic fragmentation. 

After accounting for multiple factors, the real GDP growth estimate for 2024–25 was revised down from the previous estimate of 7 percent to 7.2 percent. The growth estimate for the first quarter (Q1) was 7.3 percent, followed by Q2 at 7.2 percent, Q3 at 7.3 percent, and Q4 at 7.2 percent.

Emkay Global's lead economist Madhavi Arora added, Core inflation, which excludes volatile components such as food and fuel, is now at an all-time low of 2.97 percent, reflecting some demand imbalances and gaps in the economy.” In its latest review, the RBI maintained its FY 2024-25 inflation projection at 4.5 percent but added that food prices could continue to be sti

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