August retail inflation cools to 10-month low of 3.69%

Irving Hamilton
September 13, 2018

The consumer price index (CPI) inflation rate fell to a 10-month low of 3.69 per cent in August as food prices declined at a steeper rate in urban areas compared to July and remained nearly flat in rural areas.

The central bank has been mandated to keep retail inflation at 4 percent level, with a margin of 2 percent on either side.

The main reason for increasing the repo rate by 25 basis points is to maintain 4 percent Consumer Price Index target on a durable basis, said Reserve Bank of India (RBI) governor Urjit Patel. The target was last met in October 2017, when CPI inflation had come in at 3.58 per cent. Forecasts ranged from 3.55 percent to 5.40 percent.

Food inflation slowed to 0.29 percent from a year earlier, against 1.37 percent in July.

Among factors that influenced the projection was an increase in the minimum support price (MSP) of kharif crops by at least 150 percent, volatility in global financial markets, higher crude oil prices as well as significant rise in core inflation.

Slowing inflation in food prices, which make up almost half of India's consumer price index (CPI), cancelled out price rises in imported goods stemming from the weakening rupee currency.

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Softening inflation could give Prime Minister Narendra Modi a boost as he faces general elections next year.

While oil prices have risen almost 15 per cent this year, the rupee touched an all-time low of 72.01 against USA dollar on Wednesday's mid-day trade, before strengthening to 71.86 in later in the day.

Nationwide protests over record petrol pump prices, partly a result of the rupee slide, disrupted businesses and schools this week.

However, Devendra Pant, chief economist at India Ratings, said a robust GDP growth in the first quarter coupled with declining inflation trajectory should make the RBI optimistic about the economy and hold on the policy rate in the forthcoming policy review in view of two back-to-back hikes.

However, fuel and light inflation rose to 8.47 per cent in August from 7.96 per cent in the previous month.

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