Mumbai : Rising for the second month in a row, retail inflation shot up to 5.76 per cent in May due to rise in prices of food items, including vegetables, compared with the revised 5.47% in April and 5.01% in the May 2015. It is the highest in 19 months, and the most since the new series of retail inflation with base year of 2012 was introduced from January 2015.
The rise may make it difficult for the RBI to lower the interest rates. This follows the disappointing Index of Industrial Production (IIP) number, which showed that the industrial output had contracted by 0.8% in April. Retail inflation, in which weightage of food articles is almost 50%, was mainly driven up by food and fuel prices. Food inflation jumped to 7.55% from 6.40% on a month-on-month (MoM) basis. Most economists attributed the rise to mismanagement of supply situation and the recent recovery in global commodity prices. They do not expect retail inflation to ease in the short term, but over the medium term they believe it could dip and move closer to the Reserve Bank of India's (RBI) benchmark 5%.
Dr D K Srivastava, chief economic advisor of EY India, said the upsurge in food prices was seasonal and could dive down "as soon as monsoon sets in and fresh crop are available". "These (food prices) are temporary upsurges. Fuel price inflation is driven more by the way global demand and supply equation work out and it will settle down around this range ($50 per barrel) for the next few quarters. I would expect that, looking forward, fuel prices might remain where they are and food prices will come down in a quarter's time," he said.
As food prices are expected to tumble after monsoon, Srivastava expects the CPI inflation to inch down to around 5.3%. He said that the government should have anticipated the seasonal rise in food prices and taken remedial measures to check them. For fuel, he said, the prices could have been lowered by withdrawing some of the indirect taxes hikes made last year. "Fuel prices, they (government) do not have much control, except that they can still reduce some of the indirect tax burden that they had merrily increased last year. I am expecting food inflation to come down significantly (in the medium term) but the other components may remain where they are," said the EY economist. Dhananjay Sinha, head, institutional research, economist & strategist, Emkay Global Financial Services Ltd, guided a CPI inflation of 6-6.5% and a wholesale price index (WPI) inflation of 3.5%.
"We maintain our thesis that higher government spending along with recovery in global commodity prices and currency depreciation will contribute towards rising inflationary pressure in the foreseeable future. We expect CPI inflation at 6-6.5% and WPI 3.5%," he said in a statement. Rishi Shah, economist at Deloitte, also felt food prices had moved up due to structural mismatches in the economy, where despite good supply, prices were not falling or having a trickle-down effect at the retail level.
"That is the part where you will need support from the government and need very efficient management of the food situation," he said. Even Shah felt that the government did not have much under its control when it came to commodity prices.
He said in the next 2-3 months, inflation is likely to remain around the current levels or probably move slightly higher, but towards the end of the year, it should move down as the effect of good monsoon flows through the economy. In what could be seen as a saving grace, the core inflation came down to 4.7% last month from 4.9% a month before even as house rental inflation rose to 5.4% and personal care and professional services inflation remained high at 6.1%.
The rise in rural inflation in May was steeper at 6.45% compared with 5.52% last year than urban inflation, which moved up to 4.89% from 4.41 % during the same period. A propped-up CPI inflation also dimmed the chances of a repo rate cut by the central bank any time soon.
RBI governor Raghuram Rajan, while announcing the monetary policy a week back, had said; "There are potential disinflation pressures. There are potential inflationary pressures. The net effect is we have to put a little more weight on upside risk of inflation. The target is obviously 5% by March 2017 and we have to figure out how to attain that".