Wholesale price inflation stayed in the negative zone for the seven consecutive month in May, at -2.36%, compared with -2.65% in April, when it had dropped to its lowest level in the current inflation series, with price rise in food items slowing down further despite persistent worries about a monsoon failure this year.
The data, released on Monday, came on the back of a marginal uptick in retail inflation to 5.01% in May from a four-month low of 4.87% in the previous month and industrial production growth hitting 4.1% in April from 2.5% in the previous month.
Despite the drop in wholesale price food inflation to 3.80% in May, compared with 5.73% in the previous month, analysts sought to wait until August to gauge the actual underlying price pressure in food items once the conducive base effect wanes. Although food inflation eased in both the wholesale price index (WPI) and consumer price index (CPI) in May from the previous month, partly aided by a commodity crash globally, it came off favourable bases (food inflation was 9.63% in WPI and 8.89% in CPI in May 2014).
Core WPI inflation slowed down for the seventh straight month to -0.6% in May from -0.4% in the previous month, suggesting a rebound in demand is still far away. It had hit the negative territory in March after a gap of 65 months, although analysts believe the RBI may not read too much into it.
They also say the Met office’s downward forecast of a deficient monsoon (rainfall at 88% of the benchmark average against 93% predicted in April) came in June, so the inflation data for May may not adequately capture the price sentiment after the revised forecast. Areas under summer-sown crops, too, were down 9% until Friday from a year before, raising fears of a drop in farm output for a second straight year if the geographical spread of rain remains patchy.
While trimming the benchmark lending rate by 25 bps this month, the third time in 2015, RBI governor Raghuram Rajan had termed the monsoon as the “biggest uncertainty” facing the economy and raised the bank’s retail inflation target by 20 bps to 6% by January 2016.
However, the silver lining is monsoon rain so far this month has been 11% higher than normal (though it represents just 7% of seasonal rains) and water reserves stood at the same level as last year. Private forecaster Skymet has predicted normal monsoon season. Official granaries are brimming with rice and wheat stock and the recommendations of the Commission for Agricultural Costs and Prices, if accepted, would result in only modest hikes in minimum support prices of 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 prices of several commodities, including edible oils, continue to remain depressed in the global market, which would help tame inflationary pressure.
A Citi research note said: “…the sensitivity to inflation has been on a decline and this could especially be the case if global food prices remain benign, and trends in rural wages and MSP remain moderate.” It added that the CPI inflation could average 5% in the current fiscal, and undershoot the RBI’s target for January next year (6%). WPI, too, could average 2% with downside risks this fiscal. Such a scenario could create the leeway for a further cut of 25 basis points in the repo rate this fiscal, it added.
Some analysts, however, have a note of caution about pulses. “Further rise in inflation for pulses in May in WPI (22.8% from 15.4% in April) and CPI (to 16.6% from 12.4% in April), is a cause for concern, given the uncertainty regarding the extent and timing of monsoon rainfall in key pulses growing areas, which have an unfavourable irrigation coverage,” said Aditi Nayar, senior economist at Icra.
Asking the RBI to continue with its rate easing cycle to support demand and a “nascent recovery in industrial production”, CII director general Chandrajit Banerjee said: “The administrative measures taken by the government, including ensuring adequate food stocks, provides hope inflation will continue to remain range bound and within RBI’s specified target.”
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