India’s July retail inflation eases on lower food prices, CPI falls to 5.5%

Lower food prices eased India’s July retail inflation on a sequential basis. Data furnished by the National Statistical Office (NSO) showed that the Consumer Price Index (CPI) slipped to 5.59 per cent last month from 6.26 per cent in June.

Region wise, the CPI Urban was at 5.82 per cent last month from 6.37 per cent in June, and the CPI Rural at 5.49 per cent in June from 6.16 per cent in June.

As per the NSO data, the Consumer Food Price Index fell to 3.96 per cent last month from 5.15 per cent in June. The CFPI readings measure the changes in retail prices of food products.

The macro-economic data assumes significance as it brings retail inflation mark in the range of the Reserve Bank of India’s set target of 2-6 per cent for CPI inflation.

The declining retail inflation rate reduces the chance of the RBI to further loosen up the monetary policy.

“Sharp fall in food inflation to 3.96 per cent in July 2021 led the headline retail inflation to cool off to three months low of 5.59 per cent in July 2021,” India Ratings and Research’s Principal Economist, Sunil Kumar Sinha, said.

“Though sharp vegetables deflation was mainly responsible for sharp decline in food inflation, a strong base effect both at food as well as headline inflation was also on play in July 2021. However, headline inflation in July 2021 is still closer to the upper band of the RBI’s targeted inflation rate of 6 per cent and is higher than the targeted 4 per cent consecutively for 22 months.”

According to Sinha, fuel and light inflation remined in double digits for third consecutive month. Even transport and communications showed double digit inflation.

“Going forward, base effect will have favourable impact on headline inflation at least till October or November 2021.” “However, inflation trajectory will also depend on government’s taxation policy on petro product, which is playing a major role in pushing fuel and light inflation directly (first round) and transport and communication inflation through higher freight cost indirectly (second round impact).” ICRA Chief Economist Aditi Nayar said: “The July 2021 CPI inflation of 5.6 per cent has receded below the MPC’s upper 6 per cent threshold, and also printed below expectations, which will help in quelling anxiety about the immediacy with which rates need to be hiked.” “Nevertheless, with inflation expected to remain sticky in the 5-6 per cent range over the next three quarters, it is increasingly difficult to characterise the pressures as purely transitory in nature. A small disruption could push inflation back above the 6 per cent threshold, which implies that some uneasiness will continue about how soon the MPC may embark on policy normalisation.”

Separately, rising demand, along with low base effect, accelerated India’s June industrial output on a year-on-year basis.

Wavering impact of Covid 2.0 and easing of travel restrictions triggered demand and subsequently the production rate.

The Index of Industrial Production (IIP) for June showed a rise of 13.6 per cent from a decline of 16.6 per cent reported for the like month a year ago.

However, the production rate was lower than the exponential growth of over 28.60 per cent seen for May.

In June, the IIP index reading stood at 122.6 (index reading) as against May’s 116.

The YoY and sequential growth rate movements are being impacted by the different types of lockdowns imposed during 2020 and 2021.

Last year, while the country observed a full-fledged lockdown, the same was partially imposed across different regions of the country.

Equity indices rise: Positive domestic cues such as scrapping of domestic retrospective tax as well as hopes of a faster economic recovery buoyed India’s key equity market indices during late afternoon trade session on Thursday.

Initially, markets had a gap up opening and gradually moved up through the morning to touch record high levels.

Globally, Asian shares were mixed on Thursday as worries about Chinese regulatory changes and the spread of the Delta variant of the coronavirus weighed on sentiment. Sector wise, indices such as Media, IT, PSE and PSU Bank moved higher, whereas pharma stocks fell.

Notably, the NSE Nifty50 touched a record high of 16,375.50, while S&P BSE Sensex reached 54,862.2 points during the session.

Consequently, the S&P BSE Sensex at 2.45pm traded at 54,790.52, higher by 264.59 points or 0.49 per cent from its previous close.

The NSE Nifty50 traded at 16,352.15, higher by 69.90 points or 0.43 per cent from its previous close.

“Advance decline ratio has turned positive bringing relief to market participants. Broad market indices like smallcap and midcap indices have outperformed the Nifty,” said Deepak Jasani, Head of retail Research, HDFC Securities.

According to Gaurav Garg, Head of Research at CapitalVia Global Research: “Indian benchmark continued to trade positively after the bounce back from the support level of 16,200.”