New Delhi, June 13, 2020.

While the double-digit inflation levels for pulses, meat and fish, and oils and fats in May 2020 are a cause of concern, many of the sub-groups recorded a month-on-month moderation in prices. In particular, vegetable prices corrected appreciably in May 2020 relative to the previous month, suggesting an easing of supply disruptions, amid low demand from the restaurants and hotels segment. 

The ongoing supply cuts and a gradual recovery in global demand following the easing of lockdowns, have driven up the prices of crude oil, even as they remain considerably lower than the year ago level. The sequential rise in prices has transmitted into the retail selling price of petrol and diesel by the OMCs in the current month, which will push up inflationary pressures in June 2020.

During the period of the lockdown, the transactions in certain types of services and for many types of goods would have largely ceased, and prices would not have undergone a revision reflective of the extent of the demand shock. Accordingly, we expect a realignment of prices only once the economic activity resumes in various sectors, to reflect the post-Covid-19 demand-supply balance.

Social distancing norms and the mismatch in labour availability in urban areas, may drive up prices in some sectors. However, behavioural changes and economic uncertainty are likely to continue to curb the domestic demand for non-essential goods and services even after the economy is unlocked, which would curtail the pricing power of producers. Benefitting from the favourable base effect related to food items in H2 FY2021, we expect the average YoY CPI inflation to cool to around 4.0% in FY2021 from 4.8% in FY2020.

The minutes of the MPC’s last meeting revealed a considerable degree of alarm from some of its members. Accordingly, we expect the MPC to continue to prioritise alleviating the pain caused by the fall in economic activity, over management of inflation that will almost certainly turn out to be moderate in the near term. Therefore, we expect another 25 bps cut in the repo rate, whenever the MPC chooses to meet next. Nevertheless, the efficacy of further repo rate cuts in the current environment remains uncertain.