August CPI inflation at 6.69%: Experts say numbers above RBI target to dampen October rate cut hopes

India’s retail inflation eased slightly in August as food inflation cooled, but remained above the upper end of RBI medium-term target for the fifth straight month, government data showed on Monday.

Retail inflation in August at 6.69% was lower than the 6.85% forecast that analysts had made in a Reuters poll and the 6.73% registered in July.

Here is how analysts interpreted the inflation print and its possible impact on money policy:
Rahul Bajoria, chief economist at Barclays India
CPI inflation remained elevated in August, but surprised to the downside, coming in at at 6.69%, as sticky prices for food combined with some return in activity levels to keep cost pressures high. The increase in inflation was a result of broad-based increases in food prices and core inflation. Food inflation increased by 9.05% y/y in August, while core inflation remained flat at 5.44% y/y. As the economy starts reviving, and discretionary consumption improves, pricing power needs to be closely followed. We are currently tracking Headline CPI close to ~6.6% y/y in September 2020, and given the more gradual pace of decline in headline CPI, we are bumping up our Headline CPI projection to 5.5% for FY20/21, from 5.3% earlier. Given our new inflation forecast trajectory, we believe that room to cut rates further will likely open up only in Q1 2021. Hence we expect a one-off rate cut of 25bp in the February 2021 MPC meeting.

Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank
While CPI inflation reading continues to remain uncomfortably elevated, it has started to trend lower providing some relief. However, several uncertainties remain ahead as the supply side disruptions continue to dominate the weaker demand side pressures along with one-off idiosyncratic factors weighing on core inflation. Going ahead as inflation remains elevated in the near term, we see limited room for policy easing at least through the December policy.

Aditi Nayar, Principal economist, ICRA Ltd
The CPI inflation printed at a higher than expected 6.7% in August 2020, and was rigid at the revised level for the previous month, with a cooling of the inflation for food and housing offset by a hardening in the prints for pan, tobacco and intoxicants, fuel and light and miscellaneous items. With continuing supply distortions amidst localised lockdowns and heavy rainfall in some regions, the retail inflation for food and beverages barely edged downwards and remained uncomfortably high. Continuing double digit inflation rates for vegetables, pulses, meat and fish, eggs, oils and fat and spices remain a concern, especially given the spike in vegetable prices in September 2020. The core-CPI inflation hardened to a three-month high of 5.6% in August 2020. With the CPI inflation for August 2020 sticky at a sharp 6.7%, and unlikely to recede meaningfully in September 2020, a repo cut in the upcoming policy review seems to be virtually ruled out. Moreover, the CPI inflation is expected to print sub-4% only in December 2020-February 2021, based on which a continuation of the accommodative stance appears doubtful.

Rajani Sinha, Chief Economist & National Director – Research, Knight Frank India
CPI inflation in August has remained above RBI’s comfort zone. The concern is that sustained high inflation over the last few months will result in inflationary expectations inching up. This in turn will put further upward pressure on actual inflation. The high inflation currently is mainly because of supply-side factors, while demand-side inflation remains subdued because of economic uncertainties. Going forward, as the economy unlocks and supply-side bottlenecks ease, CPI inflation should come under control. As inflationary pressure eases in the next few months, the RBI is likely to cut policy interest rate further.

Nish Bhatt, Founder & CEO, Millwood Kane International
While it is encouraging to see retail inflation cooling a bit (MoM), it remains well above the RBI mandated target of 6%. The core inflation remaining high at 5.8% and combined food price inflation at over 9% despite the government opening up the economy in a phased manner for regular business is a cause of worry. CPI inflation has remained over the 6% mark for five straight months on the back on high food inflation. High inflation has become another challenge for the government other than addressing the pandemic and slower growth rate. The current high and sticky inflation is bound to affect RBI's ability to act on rates when it meets in October.

Rahul Gupta, Head of Research- Currency, Emkay Global Financial Services
India's August CPI stood at 6.69% and has come close to market expectations of 6.85% versus July revised figure of 6.73%. Despite unlocking phases, the supply side disruption is surging the food and fuel prices. The inflation figure for the fifth month in a row remains above RBI's medium term target of 6%; so RBI rate cut hopes still remain low at least at the October policy.