CPI numbers at 5.4% for Jun’15 were a nasty surprise for the markets. There was spate of bad news on all items, notably food inflation and even core (moved up to 4.85% from 4.7% in May’15). Our estimates show that trimmed CPI (after adjusting for both factors that are either pulling down or pulling up the CPI) is at 5.52%, a jump of around 69 bps over May’15 numbers. Rural CPI too jumped by 55 bps in Jun’15. Interestingly, inflation in Rural Household Requisites is the proxy for rural demand since this segment represents the items of daily living. Since Mar’15, inflation in rural household requisites has increased by 90 basis points to 6.9% in Jun’15. This indicates that rural demand may be picking up a little pace, though is not a concern yet. It may be noted that 2 wheeler sales, replacement sales as well as sales of tyres, HCV and even tractors have shown momentum. Hence, we need to watch this trend.
Also, we believe, a large part of the increase in vegetable prices in May’15 may been captured in the current month. This has happened in the past (Nov’14) and we believe this may have happened in Jun’15 itself. However, the good thing is that excluding pulses, CPI inflation has come in at 5% in Jun’15.
We still expect a benign CPI inflation trajectory in current fiscal. With 43% increase in sowing area under pulses (61% overall) and 70% of the subdivisions in the country witnessing normal to excess rainfall, things will get better from hereon. But, with the current trends in retail inflation trajectory, it now looks challenging for the RBI projection at 4% to be met in Aug’15. With such a projection looking a distinct possibility, it may then be difficult for RBI to cut rates in FY16, if at all.
Meanwhile after a notable increase in the May’15, average surplus cash balance of the Government has started de-clining (average at Rs 5,000 crore on daily basis as compared to Rs 80,000 in May), thereby indicating an increase in the overall Government expenditure. This increase has translated into excess liquidity in the system. Given the sea-sonal nature of Government spending, it is likely the current liquidity surplus is a temporary phenomenon and not associated with a structural shift.
By SBI Dr.Soumya Kanti Ghosh, Chief Economic Advisor