Food & Fuel fire up inflation

Written by fe Bureau | Updated: Apr 17 2014, 01:35am hrs
FoodRetail inflation also surged after hitting a 25-month low in February. PTI
Wholesale inflation hit a three-month high in March, bucking a short-duration easing trend and strengthening the notion that India has yet to tackle the persistent price rise haunting it for the last five years, reports fe Bureau in New Delhi. Retail inflation also surged after hitting a 25-month low in February. What principally caused the spurt in both indices is food and fuel items turning dearer, official data released on Tuesday showed.

While the wholesale price index (WPI) gained 5.7% in March from a nine-month low of 4.68% in February, the consumer price index (CPI) rose to 8.31% last month from 8.03% a month before.

Although a relatively unfavourable base (5.7% gain in the WPI in March last year) helped drive up the wholesale price inflation last month, what came as a surprise was a 9.28% WPI inflation in LPG last month despite a favourable base. Analysts said both the WPI and the CPI inflation may see a marginal drop in April, aided by the start of the winter crop harvest and the governments decision to hold the diesel price hike

till elections are over.

Inflation could, however, creep up again from May, making it one of the primary concerns of the new central government, along with the slump in economic growth.

The rise will worry the central bank as well, which aims to bring down retail inflation to 6% by January 2016 and it could stick to the tight policy stance, analysts said.

Core inflation a key input for monetary policy-making in the WPI hit a year-high of 3.5% in March from 3.1% a month before.

Non-food manufacturing inflation in the CPI remained unchanged at 7.9% in March from the previous month.

Coming on the back of a 1.9% contraction in industrial production and lingering concerns about the El Nino adversely affecting the farm output this year, the rise in inflation will complicate the central bank's task of balancing price rise with growth, analysts said. Although the harvesting of winter crops from April may dampen prices of food items, especially of grains, for some time, the likely impact of the El Nino which caused the worst drought in 37 years in 2009 and the new government's response towards tackling inflation will anchor the central bank's monetary policy, they added.

The rise in inflation in LPG last month from -4.09% a month before drove up the fuel and power index by 11.22% as against 8.75% in February. Similarly, CPI inflation in fuel and light went up by 6.29% last month, compared with 6.13% in February.

Wholesale price food inflation rose to 9.9% in March, snapping a three-month losing trend, while retail food and beverage inflation picked up to 9.10% from 8.57% in the previous month.

The RBI is likely to stay concerned on the inflation outlook and stick to the tight policy stance, Radhika Rao, an economist at DBS Bank, said. Policy bias will be for further rate hikes in the second half of FY14/15 when the potential El Nino development and impact on southwest monsoon become more apparent.

The Australian Bureau of Meteorology recently forecast there were greater than 70% chance that the El Nino would develop during the southern hemisphere winter (Indian summer).

With a nearly 50% weightage of food items in the CPI, any drop in farm production could ultimately have a bearing on the monetary policy, as the Reserve Bank Of India has renewed focus on targeted inflation control. The Urjit Patel panel has suggested a target of 8% CPI inflation by January 2015, 6% by January 2016, and a long-term goal of 4%, plus or minus 2%.

CII director general Chandrajit Banerjee called for supply side initiatives to raise agriculture productivity, including augmenting investment in agri-infrastructure and improving supply side management, delisting perishables from APMC, encouraging FDI in retail which would boost agriculture production, etc. Ficci's Siddharth Birla said: The central bank must take a more nuanced stand on its reading of the growth-inflation dynamics as we are fast losing ground with regard to performance of the industrial sector. Latest IIP numbers show a decline of 3.7% in manufacturing in February 2014. How long we can stay on this course should be a matter of national debate.