HYDERABAD: India's CPI inflation remained irksome throughout FY21 averaging 6.2 per cent. Will it throw new challenges in the current fiscal for policymakers, who are struggling to contain the spread of COVID-19 and prevent economic growth from contracting further?
The RBI, which typically charts the course of price rise, did publish its estimates, but maintained that the inflation outlook was uncertain and that inflationary pressures were primarily supply shocks, which would either dissipate or require proactive supply management strategies.
One-year-ahead inflation expectations of households shot up since March 2020, but could be guided by food and fuel prices. Much depends on a normal monsoon season, healthy water reservoir levels, good crop output during the upcoming Kharif and Rabi sowing seasons to keep food prices soft. Separately, wholesale prices are flashing neon signs too.
"Adverse base effects and strong sequential momentum drove WPI inflation higher, with sharp month-month price gains continuing in the fuel and manufacturing segments, which could become a cause for concern. We expect WPI inflation to conitnue to rise for a few more months, possbily reaching double digits for the first time since September, 2011 in May," noted Rahul Bajoria, Chief India Economist, Barclays.
Core inflation has been consistently above 5.5 per cent since July 2020 at 6 per cent in March 2021 reaching the highest since November 2011. Inflation for services like transport and communications, health, and recreation recorded high levels. Both growth and inflation are in uncomfortable zones.
The higher-than-expected retail inflation and lower-than-expected industrial production may raise concerns regarding stagflation. FY22 will also begin with a high base effect. During April-October 2020, CPI ranged between 6.2-7.6 per cent and the cumulative monthly momentum was 6.4 per cent versus 4.7 per cent in 2019.
This will aid lower y-o-y readings ahead. Price pressures in core CPI have been rising, barring the most recent fall, driven by both goods and services. Some of the factors which could define the inflation path include input cost pressures from higher commodity prices, of which crude oil is the most important.
However, most of the price rise seems to be over and, incrementally, it could soften if demand weakens with a rise in COVID infections, noted Sreejith Balasubramanian, Economist, IDFC AMC. He added that while some sectors skipped a price hike in 2020 and are due one in 2021, a further delay (or only a partial roll out) of the planned price hikes is possible if demand gets weaker, input prices ease, or price elasticity of demand moves higher.