Retail inflation hits seven-month high, may cross 4%

In what could be the beginning of consumer price index (CPI) or retail inflation creeping up to touch and breach the Reserve Bank of India (RBI) target of 4%, the October number came in at 3.58% against 3.28% in September, but lower than 4.2% recorded in October last year.

The retail inflation for last month published by the Central Statistics Office (CSO), Ministry of Statistics and Programme Implementation, on Monday is primarily driven up by higher fruit and vegetable, and rising crude prices.

Recent past has seen international crude prices surging and crossing $60 per barrel. Experts are predicting it to shoot up further. Since India is a net importer of its energy needs, such a trend is likely to adversely impact inflation.

The fuel and light inflation jumped by 270 basis points (bps) to 6.36% in October from 3.66% in August. In September, it was up by 5.56%. Vegetable prices soared 382 bps to 7.74% last month from 3.92% a month earlier. They had jumped by 9.97% in August.

Rallying crude prices will continue to exert pressure on retail inflation in coming months too, D K Srivastava, chief policy advisor, EY India, told DNA Money. "The pressure will start building up from now. Immediately pressure is of course from fruit and vegetables but the October crude prices are up and this will have a more structural impact on inflation. That (crude prices) will continue to put pressure on India's inflation," he said.

The EY economist projected CPI inflation to cross 4% soon; "The CPI is likely to come at more than 4% within a month or so. By the end of the year, I expect it to be at 4.25%-4.50%. Crude is a structural reason, outside of the control of the domestic policymakers," said Srivastava.

The central bank has projected retail inflation to move up to 4.2%-4.6% in the second quarter of the current fiscal – October 2016 to March 2017. This is above its medium target of 4%.

Sonal Verma, chief economist, Nomura India, said, October inflation figure was up on "higher food prices, the HRA (house rent allowance) increase and lingering inflationary effects of GST".

She also expects retail inflation in the coming months to remain elevated above 4%.

"Going forward, we expect price pressures to build due to an unseasonal rise in vegetable prices, higher oil prices, a gradual cyclical recovery and the food (cobweb) cycle. We expect CPI inflation to rise above 4% in November and stay above the RBI's target of 4% through 2018. We expect the RBI to stay on hold through 2018, including at the 6 December policy meeting," she wrote in the statement issued by Nomura.

Radhika Rao, economist, DBS Bank, believes food inflation rose in October due to "a combination of base effects and higher perishables" and felt "non-food pressures are a bigger problem at hand".

"From the fuel angle, if the oil price spike is sharp and sustained, coupled with one-off impact of rent allowance and GST impact. Given the asymmetry in the pricing behaviour, we suspect that the downward adjustments from recent GST changes will only reflect with a lag. Core inflation thereby is likely to remain elevated in the coming months, and continue to outpace the headline, much to the discomfort of the policymakers," she warned in a note issued by DBS Bank.

Rao expected RBI to revise its March 2018 projection down a notch and expect repo rate revision by the central bank in the whole of 2018.

"October's CPI and the likelihood that the 4% target will be tested in the next quarter, reinforces our expectations that the RBI will stay on hold in December and rest of FY18. On the fiscal end, we expect a modest slippage in the targets due to lower revenue generation, with the market's pain threshold for FY18 deficit at 3.5% of GDP, the target met in FY17," she said.

The CPI inflation statistics released by the government revealed rise food inflation has hardened to 1.9% in October against 1.25% in September but was softer than last year's 3.32%. Urban inflation came in at 3.81% last month versus 3.32% a month before while rural inflation climbed to 3.36% from 3.15% during the same period. Prices of pulses were down 23% while that of sugar rose by 6.25%.