New Delhi: Consumer price inflation accelerated to 8.83% in February from 7.65% in January, adding yet another element of uncertainty to prospects of the Reserve Bank of India (RBI) cutting interest rates starting in April, at a time when economists are already worried about the inflationary impact of tax increases announced in the national budget last week.
The increase in retail price inflation, based on the new Consumer Price Index (CPI), comes days after the widely tracked Wholesale Price Index (WPI) reversed its downward trend in February, rising to 6.95% from a 26-month low of 6.55% in January.
CPI is supposed to better reflect price increases borne by people. However, in February, non-food manufacturing inflation, or core inflation, declined to 5.7% from 6.7% in January.
Some economists have predicted that RBI will start reversing its monetary tightening cycle in its 17 April policy review after 10 successive interest rate increases since March 2010, but renewed concerns over inflation may lead the central bank to delay rate cuts. RBI left policy rates unchanged in its March monetary policy review, cautioning that high oil prices and a widening fiscal deficit had pushed up inflation risks in Asia’s third largest economy.
The prices gauge for food, beverages and tobacco rose to 6.62% in February from 4.11% in January, pushing up overall consumer price inflation.
Retail inflation for rural and urban India was 8.36% and 9.45%, respectively. Overall food inflation during the month was 6.33%, while for rural and urban India, it was 7.17% and 6.62%, respectively.
Finance minister Pranab Mukherjee, who widened the tax net and raised excise levies and service tax by two percentage points to 12% in his budget for fiscal 2012-13 on Friday, said the inflation rate will fluctuate for a “couple of months”.
“After that I do feel that it will fall,” Mukherjee, whose budget was criticized by some economists for its potential to spur inflation, told reporters after addressing RBI’s central board. “It will not come down very drastically to 4-4.5%. I have always maintained that it will be 6.5-7% for the year as a whole. I do hope after a couple of months it will stabilize.”
Asked about the timing of RBI starting rate cuts, Mukherjee said, “From the monetary side, as and when RBI governor will find appropriate, keeping in mind all the factors prevailing at that point of time, he will take appropriate steps.”
Economists are sceptical that RBI will start cutting policy rates in April although slowing economic growth has sparked calls for a reversal of policy tightening to spur investment.
Crisil Ltd chief economist D.K. Joshi said he would not be surprised if RBI delays a rate cut. “From the growth perspective, rate cut is due. However, given that the history of inflation for the past two years has been uncomfortable, RBI will be on the side of cautious,” he said.
Joshi said the increase in retail price inflation in February wasn’t surprising because food has the highest weightage in CPI and food inflation in February had picked up, as was evident from WPI data released earlier this month.
Wholesale food prices rose 6.07% in February after a 0.52% contraction in January.
Mukherjee has, in his budget, targeted lowering the fiscal deficit to 5.1% of gross domestic product from 5.9% in 2011-12, while raising excise and service taxes.
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“After incorporating all the price pressures emerging from the budget, we have increased our average inflation forecast to 7.2% from 6.5%,” said Samiran Chakraborty, head of India research at Standard Chartered Bank. “Though CPI is harder to predict, we see WPI increasing after the first quarter of the next fiscal due to renewed price pressures.”
He added: “But considering the near-term growth slowdown, we feel that core inflation could fall in the near term and could prompt some RBI action. But we now anticipate only a 75 basis points (bps) rate cut spread over the next few quarters rather than 150 bps we expected earlier.”
The new CPI, data on which has been released for the last two months, was proposed by the National Statistical Commission set up under C. Rangarajan, chairman of the Prime Minister’s economic advisory council. India has had three consumer indices reflecting price increases for three different segments of workers—industrial workers, agricultural labourers and rural labourers.
Work on a comprehensive CPI started in 2008 when the country saw a surge in inflation as measured by WPI. The finance ministry instructed the statistics ministry to hasten the process of releasing an all-India CPI, taking the view that wholesale price inflation overstated price rises in the economy.
Price data for the new index is collected from 310 towns and 1,181 villages. While the National Sample Survey Organisation is collecting data for urban centres, the statistics ministry has enlisted the postal department to collect price data from villages.
The new indices will temporarily have calendar 2010 as the base year, which will be shifted to 2011-12 once the 68th consumer expenditure survey is released.
Most central banks in the world use CPI-based inflation to decide their monetary policy framework. This is because CPI represents the public consumption basket and is also used in many countries as the measure for indexing public sector wages and pensions, and as the standard benchmark for wage negotiations in the private sector.
RBI has been using WPI-based inflation to take monetary policy decisions because of the absence of a unified CPI until now. RBI governor D. Subbarao has said in the past that the central bank had opted for WPI over CPI “as a second-best choice”.
“Conceptually, the CPI is a better indicator of demand-side pressures than the WPI and there is no denying that consumer prices better reflect demand-side pressures than wholesale prices,” Subbarao said at an RBI event in Mumbai in July last year.
While experts don’t expect RBI to abandon WPI as the primary inflation source, CPI-based inflation data is expected to provide additional inputs to monetary policymaking.