How was the CPI inflation numbers for the month of June 2022?

The good news is that the RBI tightening measures are working in reality. For June 2022, the CPI inflation came in lower at 7.01% against the consensus estimate of 7.10%. Over the last two months, the rate of inflation has fallen from 7.79% to 7.01%. This is in contrast to the US situation where inflation is rising consistently despite the hawkishness of the Fed. However, overall inflation at above 7% for the third month in a row is still well above the RBI outer tolerance level of 6%. That remains a challenge for the RBI.

In the Indian context, it is always the food inflation that has been the major challenge. During the month of June, the food inflation tapered marginally to 7.75%, but core inflation stayed flat at 6.11%. Food inflation between April and June has tapered from 8.38% to 7.75%. But it is too early to celebrate because this fall is on the back of a 670 bps spike in food inflation in 6 months prior to April. Hopefully, the food inflation may not get too much of help as Kharif sowing still continues to be around 20% short of targets.

The big challenge for the RBI and the Indian economy is the residual core inflation. That is the inflation after removing the cyclical impact of food and fuel. Core inflation is normally stickier and takes longer to rectify due to its structural nature. Ironically, crude oil is a key driver of inflation due to strong externalities and the trickle-down effect. But, more importantly, core inflation also poses a policy challenge. Controlling core inflation has a fiscal cost in the form of duty cuts resulting in lower revenues.

Will this data induce the RBI to go easy on rate hikes, or will they stick to hawkishness. For now, it looks like RBI will stick to hawkishness. It may target 40-50 bps rate hike in the August policy meet. Things could get tighter if the Fed hikes rates by 100 basis points as is being popularly expected. That would also give the RBI policy leeway for the future. The US inflation has now come in at a high of 9.1% and the next data point will be the WPI inflation to be announced by the government on Thursday 14th July.