Upside risks to inflation persist despite prediction of a good monsoon and might deter the Reserve Bank from going in for a rate cut in the near future, says a Dun and Bradstreet report. According to the report, rise in global commodity prices, possibility of El Nino, increase in house rent allowance under 7th Pay Commission and the initial impact on prices due to GST will add to the upside risks to inflation. El Nino refers to warming of equatorial waters of the Pacific that affects monsoon pattern in India. Moreover, core inflation — without food and fuel — has remained sticky for a protracted period despite weak demand.
D&B expects the CPI inflation to be in the range of 3.5- 3.7 per cent and WPI inflation to be 5.4-5.6 per cent during April this year. According to official data, retail prices jumped to a 5- month high of 3.81 per cent in March while WPI-based inflation slipped to 5.70 per cent in March. “While the prediction for monsoon for 2017 has been near normal, apprehension over development of El Nino phenomenon and global commodity prices might keep upside risks to inflationary pressure elevated and is likely to deter RBI from any rate cut in the near term,” said Dun and Bradstreet India Lead Economist Arun Singh.
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The Reserve Bank, in its monetary policy review meet on April 6, kept the repurchase or repo rate — at which it lends to banks — unchanged at 6.25 per cent, but increased reverse repo rate to 6 per cent from 5.75 per cent. Singh further said any deviation in the actual rainfall from the normal and impact of a possible El Nino will certainly impact revival in rural demand, which still remains elusive. Furthermore, most of the leading indicators like bank credit, eight core infrastructure industries and capital goods production remain subdued and can keep overall growth in economy muted. “The economic activity is thus likely to take time to gather pace and is largely expected to remain subdued till the first half of 2017-18. Adding to the concerns in the services sector are the US protectionist policies, the ripple effects of which will be eventually realised, going ahead,” Singh said.