Inflation rebounds from record lows to touch 2.36 pct in July; tomato prices to blame

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Published: August 15, 2017 7:02:38 AM

Despite the rise in July, headline retail inflation remained within the lower end of the central bank’s forecast range of 2-3.5% for the first half of the current fiscal, leaving some scope for further monetary easing.

Inflation rebounds, tomato prices, tomato prices in india, wholesale price inflation, food inflation, Consumer price inflation, WPI inflation, GST on services, GDP, DBS BankWPI inflation rose to 1.88% in July from just 0.9% in the previous month. (Image: Reuters)

Both retail and wholesale price inflation rose in July, thanks to a sharp jump in tomato prices that impacted food inflation. Consumer price inflation rebounded from a record low of 1.46% in June to touch 2.36% in July, as a deflation in food prices narrowed sharply. An upward revision of house rent allowance (HRA) for Central government staff and higher GST on services in the first month of its launch may have weighed on retail inflation a bit, said analysts, although the impact hasn’t been very significant yet. WPI inflation rose to 1.88% in July from just 0.9% in the previous month. Analysts say tomato prices alone drove up the headline WPI by as much as 78 basis points (bps) and CPI by 50-60 bps.

Despite the rise in July, headline retail inflation remained within the lower end of the central bank’s forecast range of 2-3.5% for the first half of the current fiscal, leaving some scope for further monetary easing. The Economic Survey for 2016-17 (Volume-II), released last week, has reckoned
the scope for further monetary easing by 25-75 basis points, or more.

The survey noted that India was possibly entering a phase of low inflation for the first time since 2005, aided by structural caps to price pressure in food and fuel. It added that both expected inflation and GDP are subdued relative to their equilibrium levels and the economy is lacking the dynamism to push inflation back toward the 4% target. Industrial production growth, too, hit a 48-month low of -0.1% in June.

However, given the impact of the higher HRA and uneven geographical spread of rainfall, especially in southern regions, could prompt the monetary policy committee (MPC) to adopt caution before trimming the repo rate further. Earlier this month, the MPC cut the repo rate by 25 basis points, the first rate cut since October last year, to 6%. But it retained its “neutral” stance and warned inflation could pick up again.

“As the favourable base effect unwinds, vegetable prices record a seasonal hardening and the impact of HRA pushes up housing inflation further, we expect the CPI inflation to ramp up over the next few months, and cross 4% by October. Based on this anticipated trajectory, and the recent commentary by the MPC, we see a low likelihood of further rate cuts in FY2018,” said Aditi Nayar, principal economist with Icra. “Policy rates have likely plateaued for now, with room for rate cuts requiring a sharp downward drift in core inflation or growth slump in the second half of this fiscal,” said Radhika Rao, group economist at DBS Bank.

Last week, supporting the case for a sharp rate cut, the survey said the RBI had overestimated inflation by more than 100 basis points in six of the past 14 quarters (three in 2014 and three in the most recent period) with an average error of 180 basis points.

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