Retail inflation fell to a 75-month low of 2.8 per cent in May, from 3.2 percent in April. This is the fourth consecutive month where inflation stood below 4 percent. The decline was driven by food prices, which fell to a 43-month low. However, core inflation rose to a 19-month high. On balance, the headline number beat the market consensus of 3 percent.
Analysts believe that a robust rabi harvest and expectations of a healthy kharif output due to above-normal monsoon should keep food prices in check this fiscal. But high-frequency indicators show a surge in prices of vegetables and fruits, while the prices of cereals and pulses continue to dip.
For now, the core inflation remains benign amid easing international commodity prices. But the escalating Israel-Iran war has overturned market optimism, adding to other geopolitical tensions and trade policy uncertainties.
Following Israel’s pre-dawn missile strike on Iran on Friday, Sensex plunged 1,300 points. Iran holds about 9 per cent of the world’s oil reserves, and as the strike intensified tensions in a key West Asian oil-producing region, crude prices jumped over 13 percent, with the benchmark Brent contract hitting $78.50 a barrel—its highest since January.
If tensions persist for over the next 3-6 months, it’s likely that crude prices would rise above $82-85; J P Morgan analysts expect the new perch to be as high as $120 in a worst-case scenario. Besides price rise, any disruption in global oil supplies will slow down demand, drive up inflation and exacerbate the prevailing pressure on global markets, which are already reeling under an uncertain US trade policy overhaul.
India relies on imports for over 80 percent of its crude oil needs, and a higher import bill will widen the current account deficit, which is expected at 1.2 percent of GDP this fiscal.
India also is the largest consumer of gold, which on Friday shot past the psychologically significant mark of Rs 1 lakh per 10 gram for the first time ever on MCX. So the risks of imported inflation remain elevated, just as the RBI indicated last week about a protracted disinflationary process. As it is, policymakers are grappling with global trade policy uncertainties that are threatening to spur inflation and lower global growth. If this happens, it will restrict the central bank’s ability to lower policy rates any further.