Outlook for Consumer Price Index (CPI) inflation for the whole of 2016-17 is likely to be below the RBI’s target of 5%, stated the Economic Survey. This trend would possibly be aided by the softening of the wholesale and retail prices of food items especially in the second half of the current financial year, as well as the demonetisation drive leading to lowering of demand in the economy.
For the next financial year, the recent uptick in global commodity prices, in particular crude oil prices, poses an upside risk. Inflation toughened in the initial months of 2016-17, primarily due to upward pressure on the prices of pulses and vegetables.
The CPI-new series inflation, which averaged 4.9% during April-December 2016, has exhibited a declining trend since July when clear signs appeared that kharif agricultural production, particularly pulses, would be sufficient to meet the domestic demand.
Inflation has always been caused by a small group of food items and among them pulses continued to be the major factor. The decline in pulses prices has played a significant role in lowering the CPI inflation which reached 3.4% at December-end. The Survey also attributed the decline in CPI inflation to codification of institutional arrangements on monetary policy. The Reserve Bank of India (RBI) Act, 1934 was amended by the government that provided setting inflation target and additionally constituting an empowered Monetary Policy Committee (MPC).
The average inflation based on the wholesale price index (WPI) nosedived to (-) 2.5% in 2015-16 from 2.0% in 2014-15.
The declining trend reversed from the impact of rise in global commodity prices and also owing to adverse base effect during the current financial year. The WPI inflation stood at 3.4% in December 2016 and the average inflation was 2.9% during April- December 2016.