How do you see the lower retail inflation for May 2022? Is it a positive for the Indian markets?

The inflation gave some good news for the month of May 2022. The actual inflation at 7.04% was very close to the consensus estimate of 7.01%. That was a big relief after the rather steel CPI inflation at 7.79% in the month of April 2022. What has driven inflation lower? It was largely driven by food inflation falling from 8.31% to 7.97% as the expectations of another bumper Kharif season and good monsoons kept the food inflation in check.

However, it would be too early still to celebrate for three reasons. Firstly, the month of May 2022 still marks the 5th consecutive month when headline inflation was above the upper tolerance limit of the RBI at 6%. Secondly, May 2022 also marks the 32nd successive month that retail inflation remained above the RBI median target of 4%. More importantly, markets are wary that the heat wave in June could worsen matters for the Kharif output.

In the couple of months, it was rural inflation that was driving inflation higher. That changed in May 2022. Combined rural inflation fell from 8.38% to 7.01% on a sequential basis while the rural food inflation fell from 8.50% in April 2022 to 7.76% in May 2022. However, the subtle risk here is that it is still not clear if the low inflation is indicative of lower prices or a signal that weak rural demand was hitting prices.

No discussion on inflation is complete without adequate reference to food inflation and core inflation. While food inflation tapered, it must be noted that vegetable inflation spiked to 18.26% in May 2022 compared to 15.41% in April 2022 and 11.65% in March 2022. Now, vegetable inflation has a weightage of 13.2% in the food basket. However, the feel good factor came from the fact that inflation in most high protein foods fell in May 2022.

Let me now turn to core inflation. The whole problem with core inflation is that, although it has trended lower, core inflation is normally a revenue dilemma. Getting core inflation under control is a trade-off between prices and loss of revenues. The government is aggressive in its battle against inflation but that has a fiscal cost as it hits revenues. That is the big challenge in containing core inflation for too long.

Finally, what does it mean for the RBI stance? RBI has hiked repo rates by 90 bps and CRR by 50 bps. RBI has made a choice that between boosting growth and reining in inflation, they prefer reining in inflation. Having said that, the risk from imported inflation is still there and the government or RBI have little control. For now RBI is focussing on reining in prices.