×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Low commodity prices alone cannot bring down inflation to 6%

Low commodity prices alone cannot bring down inflation to 6%
Comment E-mail Print Share
First Published: Wed, Jun 08 2011. 05 40 PM IST

Updated: Wed, Jun 08 2011. 05 40 PM IST
New Delhi: The main trend that emerged from fourth quarter results is that manufacturing firms suffered heavily due to rising input costs. Is that pain about to end? Will it also lead to a softening of inflation?
Commodity prices have been correcting for the past couple of months. From a peak of 370 on 29 April, the Thomson Reuters Jefferies CRB index has dipped by 6.8% to 345 on 6 June. With commodity prices showing signs of exhaustion, policy makers are hopeful that inflation will ease in coming months.
However, lower commodity prices alone won’t bring down the inflation to the Reserve Bank of India’s comfort zone of 6%, feels Nomura’s economist Sonal Varma.
According to sensitivity analysis done by Sonal Varma, low commodity prices - even though immediately reducing input cost pressures - have limited cooling effect on wholesale prices (WPI). According to her calculations, a 5% sustained fall in commodity prices can bring down inflation by 77 basis points. But, a slowing economy, on the other hand, can lower inflation by 95 basis points.
Nomura economist Sonal Varma notes:
Over our forecast horizon (Q1 2012), a 1 percentage point fall in non-agriculture GDP growth can lower inflation by 95 bp relative to our baseline, more than the impact of a 5% sustained fall in commodity prices (at 77 bp).
The sensitivity analysis found that a combination of low commodity prices and slowing growth works best in reducing the inflation. According to Nomura calculations, these two variables, combined together, will have maximum impact on inflation.
Notes Sonal Varma:
Interestingly, the results show that it will take a combination of slowing growth and lower commodity prices to achieve the RBI’s stated WPI inflation projection of “6% with an upside bias” by March 2012.
WPI Inflation Scenario Analysis
Footnote: Baseline scenario assumes that non-agriculture GDP growth moderates to 8.7% YoY in FY12 (year ending March 2012) from 8.9% in FY11, INR/USD appreciates to 42.8 by Q1 2012 from 44.6 in Q1 2011, money supply grows at around 16% and the CRB index remains at 364 through Q1 2012.
With the GDP growth already showing signs of slowing, continued deceleration in commodity prices would just do the trick.
Comment E-mail Print Share
First Published: Wed, Jun 08 2011. 05 40 PM IST
More Topics: Markets Update | Commodity | Inflation | Economy | GDP |