CPI inflation soars, dashes rate-cut hopes

Consumer price index (CPI) inflation or retail inflation surged 3.36% in August compared to 2.36% in July on soaring food and petrol prices, higher housing expenses and a “transient” impact of the recently-introduced indirect levy goods and services tax (GST).

This data released by the government on Tuesday along with that of a weak Index of Industrial Production (IIP) growth of 1.2% in July dashes all hopes of the central bank cutting the current repo rate of 6% when it reviews its monetary policy in the first week of October.

Last month’s retail inflation figure published by the Ministry of Statistics and Programme Implementation showed that the core inflation continued to remain firm at over 4%.

Radhika Rao, India economist at DBS Bank, attributed the jump in the headline and core inflation numbers in August to higher transport, housing and “transient” impact from price changes due to the GST rollout.

“A higher core and with August headline inflation on the higher end of the central bank’s 2-3.5% target for 1HFY18 (first half of fiscal 2018) will douse any lingering expectations for an October rate cut,” she said in a statement issued by her firm.

D K Srivastava, chief policy advisor at EY India, said core inflation, that has stubbornly remained hard, revealed “an interplay of structural downturn” in the economy.

“Core inflation index being high is a cause of concern because that means more of an interplay of a structural downturn. So I think, CPI may remain below 4% for another few months, but it is now much above the expectation of ministry of finance,” he told DNA Money.

Going by the latest CPI and IIP statistics, the EY economist does not expect a repo rate cut anytime soon.

Aditi Nayar, principal economist, Icra, expects inflation to further climb up in the coming months due to the lag in major kharif crops sowing.

“The sowing of major kharif crops as on September 8, 2017, lagged the year-ago levels, such as oilseeds, pulses and coarse cereals, which may affect their prices and exert some upward pressure on the CPI inflation in the coming months,” she said.

According to her, dip in prices of vegetables such as tomatoes and potatoes in the current month, till now, could arrest the uptick in food inflation to some extent; “in addition, prices of onions, while still high, have retreated from the peak recorded in late-August 2017”.

The Icra economist said the persistently rising prices of petrol and diesel were also pushing up freight rates. She also sees housing inflation rising further due to the revision in the House Rent Allowance (HRA) of central government employees, which is likely to have a staggered impact on the housing index of the CPI.

“The CPI inflation is expected to harden further in September 2017, led by food and beverages, transport and communication, and housing, and cross 4% by November 2017,” she said.

And even though she estimates the average CPI for the current fiscal to settle at around 3.7%, which was closer to Reserve Bank of India’s inflation target, she feels that subdued GDP growth could reduce chances of a further rate cut in 2017.

Even the industrial output data showed slow recovery in July to 1.2% growth from contraction by 0.2% in June due to the disruption caused by the launch GST in July.

“Jump in IIP was also largely in line with our estimate, with expectations that the end of pre-GST destocking, start of the festive season, good monsoon and pick-up in disposable incomes due to higher wage/allowances likely to provide modest support to consumption and production outlook in rest of FY18,” said Rao of DBS Bank.

EY’s Srivastava also expects industrial production to turn around in a few months once the effect of GST settles down; “We have to wait for another quarter before we can see start seeing a stable positive upturn in the economy”.