Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Stock-market-news/  Rains key to CPI target
BackBack

Rains key to CPI target

If El Nino occurs by summer, it will drive rain clouds away and have an effect on June-September monsoon

There is a fairly strong correlation between the Southern Oscillation Index, a lead indicator, and the agricultural gross domestic product growth. Concerns remain that this could hurt FY15 growth by 50-75 bps, especially if RBI delays rate cuts due to rising agflation or inflation. Photo: MintPremium
There is a fairly strong correlation between the Southern Oscillation Index, a lead indicator, and the agricultural gross domestic product growth. Concerns remain that this could hurt FY15 growth by 50-75 bps, especially if RBI delays rate cuts due to rising agflation or inflation. Photo: Mint

The coming monsoon holds the key to Consumer Price Index (CPI) inflation. As it is, hailstorms have driven up food prices and pushed March CPI up to 8.3% from 8.0% last month. A 5.0% swing in food prices affects CPI inflation by 250 basis points (bps). Core CPI inflation, despite a marginal fall, remains high at 7.8% as housing price inflation is overestimated at around 10.0%. Food price inflation has gone up to 9.1% from 8.6% in February.

The Wholesale Price Index (WPI) inflation in March has also rebounded to 5.7% from 4.7% last month. The Indian Meteorological Department’s first monsoon forecast in mid-April will come at a time of rising El Nino risks. On balance, Reserve Bank of India (RBI) governor Raghuram Rajan may hold rates on 1 June.

By mid-April, food prices, both at the retail and wholesale level, rose back to January levels. Weighted average retail food inflation is being tracked at 3.4% in April, higher than March’s 2.7%. At the wholesale level, weighted average food inflation is up to 2.4% in April from 1.8% in March. Across both retail and wholesale prices, main food items that are showing an increase are pulses, vegetables, sugar and milk. On the other hand, cereal prices are softening a bit while food-oil prices stay flat.

Core CPI inflation is expected to remain about 8.0% as long as housing price inflation is over-estimated at 10.0%. Anecdotal evidence suggests that rentals are rising at a far slower pace than CPI housing numbers suggest. If the rise in rentals is taken at a more realistic 5%, CPI inflation will come off to 6.8%, well below the average of 7.1% since 1996.

March WPI inflation surprised on the upside. Agflation increased to 7.7% from 6.3% last month on hailstorm effects. Manufacturing inflation also climbed to 3.2% from 2.8% partly as producers pass on the impact of depreciation to the customer. Manufactured food products inflation (1.9% in March relative to 0.9% last month) and metals inflation (1.7% in March relative to 0.9% last month) were the primary contributors to a higher manufacturing inflation. Finally, fuel inflation was also higher at 11.2%, up from 8.7% in February on base effects.

Bank of America-Merrill Lynch core-WPI (excluding food, fuel and metals) increased to 4.3% from 3.4% last month. Most of this increase is explained by higher coal inflation (0.1% in March relative to -9.7% in February). Non-food manufacturing core-WPI inflation remained at a weak 3.5%, albeit higher than February’s 3.1%, with high rates killing pricing power. Incidentally, a government committee is also slated to recommend a fresh WPI series soon.

IMD’s first monsoon forecast in mid-April at a time of rising El Nino risks will be very important. The Southern Oscillation Index (SOI), a lead indicator, has dipped in recent weeks (a consistent reading below the -8 mark signals an El Nino event). If El Nino occurs by summer, it will drive rain clouds away and impact the June-September monsoon. If it stretches to the fall, India will mercifully escape. The Columbia University Earth Institute reports probabilities for El Nino below 40% through May-July 2014, rising to 59% for June-August, and settling in the 64-73% range from July-September through November-January.

There is a fairly strong correlation between the SOI and the agricultural gross domestic product growth. Concerns remain that this could hurt FY15 growth by 50-75 bps, especially if RBI delays rate cuts due to rising agflation or inflation. CPI inflation will get stuck at 8-10% as El Nino will push up food inflation instead of coming off to 7% levels by 2015.

Edited excerpts from report India Economic Watch-Inflation: To El Nino or not to El Nino by Bank of America-Merrill Lynch.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 21 Apr 2014, 01:22 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App