Rate cut hopes dim as June retail inflation hits 8-month high

India’s retail inflation rate rose to an eight month high of 5.40% in June, driven by higher food prices, dampening interest rate cut hopes as it inched closer towards the Reserve Bank of India’s (RBI’s) tolerable limit of 6%.

India’s retail inflation rate rose to an eight month high of 5.40% in June, driven by higher food prices, dampening interest rate cut hopes as it inched closer towards the Reserve Bank of India’s (RBI’s) tolerable limit of 6%.

Consumer price index (CPI)-based retail inflation — a metric to measure changes in shop-end prices — acts as the RBI’s main guide on interest rate-related decisions.

All eyes are on the RBI’s monetary policy review meeting next month as policy makers seek to sustain budding recovery signs in Asia’s third-largest economy.

The RBI uses monetary tools to stymie demand and cool prices. In times of weak growth and low prices, it is usually expected that the central bank will cut interest rates to goad companies to invest, add capacities, hire more, and prompt people to spend on houses, cars and other goods.

In June, the RBI cut its main lending rate — the repo rate — by 0.25 bps to 7.25%, prompting banks to cut rates and lowering home-loan EMIs for some category of borrowers.

RBI governor Raghuram Rajan has cut the repo rate by 0.75 bps in three tranches since January.

Rajan may also closely observe the trends in food inflation and the monsoon rain, crucial for the summer-sown kharif crop.

Food inflation, a measure of how costly the platter has become over a 12-month period, rose 5.48% in June from 4.80% in May and 7.21% in June last year.

Overall retail inflation was 5.01% in May and 6.77% in June last year.

Vegetables were 5.37% costlier in June compared to a year ago and price of pulses went up by 22.24%. Among others, milk and its products were costlier by 7.18% in June against a year ago. Prices of protein-rich items such as meat and fish rose by 6.99%, while spices turned costlier by 9.71% during the month.

“While hardening of vegetable prices is largely seasonal, the sharp rise in prices of protein items such as pulses, egg, meat and fish poses a larger concern,” said Aditi Nayar, senior economist at credit rating firm ICRA Ltd.