High-Value Food Items Drive Retail and Wholesale Inflation Higher: Ind-Ra
Ind-Ra opines it may see some action once the uncertainties related to the Brexit and Fed action are over and the bond market shifts its focus back on the scope of incremental open market operations leading to an improvement in the systemic liquidity
Ind-Ra Mumbai-14 June 2016: Consumer Price Index (CPI) increased to 5.76 per cent in May 2016 as against India Ratings and Research’s (Ind-Ra) forecast of 5.40 per cent. However, Wholesale Price Index (WPI) came in at 0.79 per cent, quite close to Ind-Ra’s forecast of 0.70 per cent. 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.
Retail food inflation (excluding non-alcoholic beverages and prepared meals) rose to 7.6 per cent yoy in May 2016 from 6.3 per cent in the previous month. Pulses inflation moderated but still remains in high two-digit levels (31.6 per cent yoy in May from 34.2 per cent in the previous month). Vegetables price rose sharply to 10.8 per cent yoy in May from 4.8 per cent in the previous month. Sugar inflation increased nearly 14 per cent yoy in May (April: 11.2 per cent yoy). The four commodity groups - eggs, fruits, vegetables and sugar, with a weightage of 10.21 per cent in CPI, contributed more than 28 per cent to CPI inflation in May 2016. Likewise on the WPI front, food inflation jumped to 7.9 per cent yoy in May 2016 from 4.2 per cent in the previous month. Pulses, vegetables, meat, egg and fish alone contributed 63.4 per cent 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 per cent to 3 per cent. However, retail pulses inflation which has remained above 30 per cent since October 2015 is unlikely to see a significant moderation given the supply and demand gap. 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. 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.
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 per cent yoy in May 2016 from 3.0 per cent 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 per cent yoy in May from around 5 per cent 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 writings 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 Fed action are over and the bond market shifts its focus back on the scope of incremental open market operations leading 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.