1. CPI inflation rises for second straight month

CPI inflation rises for second straight month

Rises to 5.4% in June; food inflation rises almost 0.7 percentage points, pushed by spurt in prices of pulses

By: | New Delhi | Updated: July 14, 2015 1:39 AM

Retail inflation rose for a second straight month to 5.40% in June, compared with 5.01% in the previous month, mainly as food inflation unexpectedly shot up by almost 0.7 percentage points from the May level on the back of a spurt in pulses prices, showed the official data released on Monday.

Analysts said the higher-than-expected rise in the consumer price index (CPI) and a recent slowdown in monsoon showers from its peak in June have reduced the leeway for the Reserve Bank of India (RBI) to cut the benchmark lending rate in its next monetary review policy meeting in August to spur demand, despite a slowdown in the industrial production growth to 2.7% in May from 3.4% in the previous month.

The data also surprised some analysts due to the lower-than-expected rise in the core CPI at 4.8% in June from 4.6% a month before. “The surprising factor for the rise in the CPI was that it was food-driven, while we were expecting it to be driven by core inflation, given the increase in the service tax in June (from 12.36% to 14%). We expect the RBI to hold on to the interest rates for now,” said Sonal Verma, India economist at Nomura in Mumbai.

Although some rise in food inflation was anticipated following the forecast by the Met department of a deficient monsoon season in 2015, the spurt to 5.48% in June, against 4.8% in May, was beyond expectations. This is because despite the gloomy forecast by the India Meteorological Department (IMD), the country received a 16% above-normal rainfall in June.

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However, pulses inflation skyrocketed to 22.2% in June, compared with 16.6% in the previous month and 12.4% in April, thanks primarily to a 10% drop in production of the commodity in the crop year through June, excessive speculations of a domestic scarcity as well as hoarding in view of the prediction of a deficient monsoon for a second straight year. The country usually imports one-fifth of its annual requirement of around 20-21 million tonnes.

The government will release on Tuesday the data on wholesale price inflation, which had stayed in the negative zone for seven consecutive months and hit -2.36% in May, the lowest in the current inflation series.

While trimming the benchmark lending rate by 25 basis points this month, the third time in 2015, RBI governor Raghuram Rajan had termed monsoon as the “biggest uncertainty” facing the economy and raised the central bank’s retail inflation target by 20 basis points to 6% by January 2016.

Inflation in the fuel and light segment, however, eased a tad to 5.9% in June, compared with 6% in May when oil-marketing companies had effected two rounds of hikes in diesel and petrol prices.

The CPI data showed Chhattisgarh witnessed the highest retail inflation of 8.34% in June, followed by 7.39% in Karnataka, while West Bengal (2.54%) and Uttarakhand (3.41%) faced the lowest inflation during the month.

While the spurt in vegetable prices is largely seasonal, the sharp increase in prices of protein items such as pulses, egg, meat and fish poses a larger concern. Although the area under pulses up to July 10 was almost 44% higher than a year before (thanks to delayed sowing last year following initial dry-spells), the coverage is still lower than the 2013 level. The weather office has also forecast an 8% drop in rainfall in July and 10% in August from the normal levels.

However, the silver lining is that with the surge in rains in June beyond official expectations, seasonal rainfall is just 3% below normal until now although the intensity of monsoon may have slowed down recently.

Water reserves, too, are 19% higher than the benchmark normal average and official granaries are brimming with rice and wheat stock. The government has also announced only modest hikes in the minimum support prices of various summer-sown crops.

Rural wage growth, too, has remained subdued since January (at below 5%, compared with the average annual rise of 15% in six years through 2013) and the ability of retailers or even producers to raise prices is also limited due to weak rural demand.

Prices of several commodities, including edible oils, continue to remain depressed in the global market, which would help tame inflationary pressure.

“Notwithstanding the sharp month-on-month rise in food inflation, the build-up in food prices in the current fiscal remains lower than what was recorded up to June 2014. Moreover, a favourable base effect and the recent softening of crude oil prices are expected to dampen the headline CPI print for July this year. Nevertheless, this may not be adequate to prompt a reduction in the repo rate in August policy review, if the trend in rainfall and sowing in the remainder of July turns out to be unfavourable,” said Aditi Nayar, senior economist with ICRA.

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