Retailwinds delayed, so, nothing to fret

Retail inflation has ticked above RBI's target after 17 mths. But the central bank is unlikely to be in a hurry to hike interest rates. June's 4.38% rise in inflation based on CPI was driven by fuel after a series of price hikes by oil refiners, and a spike in food inflation on account of the delayed monsoon onset. Core inflation, excluding volatile food and energy that offers RBI a better measure of generalised inflation, is estimated at 4% in June, and retail inflation averaged 3.9% in the April-June quarter. For the full year, inflation could undershoot its official target if oil prices stabilise to their pre-West Asia crisis levels and the kharif crop sowing deficit is contained. The inflation reading is also being propped up by the low base of the prior year and will inform RBI's inactivity over rates.

At its monetary policy committee's rate-setting meeting last month, RBI had raised the full-year inflation forecast to a moderately high 5.1% as the second-order effects of the oil shock work their way into prices. The pass-through of fuel costs is delayed and incomplete while the government will absorb most of the rise in urea prices. Surge in plastic prices will have a delayed impact on core inflation that allows central banks to look through episodic spikes in food and fuel inflation. There is fiscal headroom to absorb the partial pass-through of fuel and fertiliser prices, and monetary policy will reset over the medium term to minimise the growth sacrifice. The global interest rate scenario, too, would suggest a prolonged hold by central banks rather than hikes. Evidence points to lower inflationary expectations following the US war on Iran rather than after Russia's war on Ukraine.

But all shouldn't be gloom'n'doom. Energy prices will ultimately trend lower, and commodity markets will eventually return to the oversupply they began the year with. The window of India's higher vulnerability to imported inflation is closing. As the truism goes, all things must pass - and, indeed, prices pass through.