Supply-Side Bottlenecks: August retail inflation expected to remain high on COVID impact

The COVID-19 induced supply-side constraints are expected to keep India’s retail price inflation at an elevated level, consequently, eroding chances of a RBI lending rate cut.
Accordingly, leading economists, pegged the range of consumer price inflation numbers for August at 6.5-7.1 percent.
The inflationary pressure has been mounting ever since measures to curb the pandemic were introduced.
Resultantly, these curbs have heavily dented transport, supply chains, manufacturing, services and other sectors.
“We expect CPI print to come in the range of 6.3 to 6.7 percent in August. The supply side disturbances still persist. Consequently, we also do not expect rate cut in the next policy review,” Sunil Kumar Sinha, Principal Economist, India Ratings & Research told IANS.
“However, going forward food prices on account of a healthy kharif output is likely to come down.”
In terms of supply-side constraints, industry watchers, cited issues such as bottlenecks to transport, labour and working capital availability.
“The ongoing supply constraints and the logistical bottlenecks arising from the intermittent lockdowns may continue to keep food inflation at elevated levels despite a healthy growth in the agricultural sector,” said Suman Chowdhury, Chief Analytical Officer at Acuite Ratings and Research.
“We believe that any further cut in rates at this stage may not contribute to higher consumption demand.”
Besides, lower growth and rising inflationary pressure has again pointed towards the possibility of ‘Stagflation’.
This economic trend is marked by rising inflation and falling GDP growth.
In terms of slowdown, India’s GDP has contracted by 24 percent a year-on-year basis for three months to June 2020, the sharpest decline among major economies.
“Consistent supply-side price shocks both on food and non-food segments and higher administrative costs have added upside bias to our inflation trajectory,” said Madhavi Arora, Lead Economist, FX and Rates for Edelweiss Securities.
“We now see inflation hovering much above 6 percent in the near-term, and averaging more than 5.5 percent in FY21. Given high and uncertain inflation dynamics being MPC’s rationale to pause in August, our inflation trajectory suggests that technically the next opportune time to cut may not come before the end of 3QFY21.”
The central bank’s target for retail inflation is set within a band of 4 percent with an elasticity of +/-2 percent.
Recent rise in retail inflation had led the RBI’s MPC to hold the interest rates in August and has diminished the likelihood of any further rate cut in the near term.
“We expect some softening in the cpi inflation to 6.4 percent in August 2020,” said Aditi Nayar, Principal Economist, ICRA.
“However, the spike in vegetable prices may result in a reversal in this trend in September 2020. The chances of an October rate cut seem minimal.”
According to M. Govinda Rao, Chief Economic Advisor, Brickwork Ratings: “The RBI will continue with the current accommodative stance by conducting more OMO’s. The current level of inflation is not due to demand, but mainly due to supply constraints.”
“As the restrictions in the economy progressively relaxed, the capacity utilization will improve and the supply constraints will ease to stabilize both output and prices.”
Last month, official data showed that a substantial rise in food prices lifted India’s July retail inflation to 6.93 percent from 6.23 percent in June.
India’s consumer food price index during the month under review rose to 9.62 percent from 8.72 percent reported for June 2020.