SBI Research sees retail inflation trending down further

MUMBAI: Retail inflation which fell to a 30- month low of 7.31 per cent in June is likely to continue its downward trend and may decline below 7 per cent over the next three-four months, an SBI research report said today.

Retail inflation, as measured by consumer price index (CPI), was 8.28 per cent in May. Its lowest was 7.65 per cent in January, 2012.

"Going forward, even though the forecast for the monsoons remains a little wobbly, the CPI trajectory will be declining and is likely to go below 7 per cent over the next three-four months," SBI said in its research report 'Ecowrap' authored by its chief economic advisor Saumya Kanti Ghosh.

As on July 13, overall rainfall is 43 per cent less than the normal average.

Decline in June CPI inflation was mainly on account of lower prices of food items, including vegetables, cereals and meat.

"We believe, with cereals having a weightage of 14.6 per cent in CPI, the government can rapidly pull down the CPI number by releasing food grain stocks into the open market," the report said.

It said the government's increases focus on infrastructure may lead to a faster growth in productivity rather than consumption which will help in a lower and stable inflation regime.

"This in conjunction with the recent railways initiative to transport perishable goods in AC compartments will address supply side logistics," the report said.

Another brokerage house Bank of America Merrill Lynch also expects the government to combat inflation through supply side measures rather than monetary tightening.

RBI governor Raghuram Rajan will likely remain on long hold through 2015 from our base case of a first cut in December, it added.