Consumer Price Index (CPI) increased to 5.76% in May 2016 as against India Ratings and Research’s (Ind-Ra) forecast of 5.40%, according to a research note from the ratings agency. However, Wholesale Price Index (WPI) came in at 0.79%, quite close to Ind-Ra’s forecast of 0.70%. Both CPI and WPI were primarily driven by inflation in high-value food items such as meat, fish, eggs, fruits, sugar and vegetables in May 2016.
According to the research note, retail food inflation (excluding non-alcoholic beverages and prepared meals) rose to 7.6% yoy (year-on-year) in May 2016 from 6.3% in the previous month. Pulses inflation moderated but still remains in high two-digit levels (31.6% yoy in May from 34.2% in the previous month). Vegetables price rose sharply to 10.8% yoy in May from 4.8% in the previous month. Sugar inflation increased nearly 14% yoy in May (April: 11.2% yoy). The four commodity groups - eggs, fruits, vegetables and sugar, with a weightage of 10.21% in CPI, contributed more than 28% to CPI inflation in May 2016. Likewise on the WPI front, food inflation jumped to 7.9% yoy in May 2016 from 4.2% in the previous month. Pulses, vegetables, meat, egg and fish alone contributed 63.4% to wholesale food inflation in May 2016.
Monsoon, at best, would have some softening impact on cereals inflation which has remained in the range of 2% to 3%. However, retail pulses inflation which has remained above 30% since October 2015 is unlikely to see a significant moderation given the supply and demand gap, points out Ind-Ra. Prices of items such as meat, eggs, fish, fruits and vegetables are likely to be even less impacted by a favourable monsoon. Price rise in these items is less cyclical and more structural in nature.
Ind-Ra analysts observe that so long as structural issues such as productivity in agriculture and inadequacy in agricultural supply chain are not adequately addressed, food inflation will remain a perennial problem for the Indian economy. Therefore, pinning hope on monsoon to keep food inflation at a moderate level would be a misplaced bet, infers Ind-Ra.
The economy, so far, has benefited on the fuel front due to weak global crude prices. On the retail side, fuel prices came in marginally lower at 2.9% yoy in May 2016 from 3.0% in the previous month. Likewise, weak domestic demand has kept a check on manufacturing inflation. Core inflation (non-food non-energy) moderated to 4.8% yoy in May from around 5% in the previous month. Once this comfort begins to recede, which is likely due to the base effect, containing inflation around current levels would become even more challenging.
The Reserve Bank of India by not undertaking monetary easing in its second bimonthly review seems to have not only read the writing on the wall correctly, but also warned correctly about the looming threat to inflation from higher food prices. Although Ind-Ra is not ruling out one more rate cut this fiscal, the room for doing so has definitely shrunk due to the three months of consecutive rise in retail inflation.
Anticipating an uptick in inflation, the yield curve has already moved up ahead of the data release and is likely to trade higher due to the diminished scope of a rate cut in the near term. However, Ind-Ra opines it may see some action once the uncertainties related to the Brexit and US Federal Reserve action are over and the bond market shifts its focus back on the scope of incremental open market operations. This is expected to lead to an improvement in the systemic liquidity. So far as the rupee is concerned, it is unlikely to be affected by the inflation numbers and its movement will be contingent upon the global macroeconomic developments, concludes the research note.