New Delhi: India’s retail inflation rate crept back to the double-digit level in August, led by a surge in food prices, data released on Tuesday showed, underlining the upward pressure on prices that has restrained the central bank from cutting key policy rates to boost faltering economic growth.
The Consumer Price Index rose 10.03% in August compared with a year earlier and from 9.86% in July, a day after the Reserve Bank of India (RBI) kept its key rate unchanged for the third straight time.
Prices of vegetables (20.79%), sugar (17.51%), and protein products such as pulses (16.04%), eggs, fish and meat (11.54%) and milk products (11.43%) drove up retail price inflation last month.
Data released earlier showed the more widely tracked Wholesale Price Index rose 7.55% in August compared with a year earlier and from 6.9% in July.
On Monday, RBI cited persistent inflationary risk in keeping interest rates steady, while cutting the cash reserve ratio, or the proportion of deposits that banks must keep with the central bank, by a quarter of a percentage point. After cutting the repo rate, at which it lends overnight funds to commercial banks, by half a percentage point in April, RBI has resisted calls for further rate cuts.
Food inflation has remained high, partly due to expectations of weak monsoon rainfall, said C. Rangarajan, chairman of the Prime Minister’s economic advisory council.
“By the middle of September we know that the monsoon is not as bad as it has been, and so the inflation expectation will come down in the coming weeks and months,” he told reporters in New Delhi.
That may not translate into lower inflation. The government last week increased diesel prices by Rs.5 per litre and capped the supply of subsidised cooking gas at six per household per year in a bid to reduce fuel subsidies and reduce the revenue loss to oil marketing companies that sell fuel at below production cost.
The diesel price increase is expected to have a 60 basis point impact on inflation in Asia’s third-largest economy. One basis point is 0.01 percentage point.
“I think what has been announced is almost the minimum that should be done under the circumstances,” Rangarajan said.
Planning Commission deputy chairman Montek Singh Ahluwalia said: “Diesel in India still cost less than what it did in neighbouring countries.”
“If we still want to subsidise diesel prices, either health, education and other expenditure will have to be cut or the oil companies will not be able to invest in exploration and production. Also, if you keep prices low, there are no incentives for using energy efficiently,” Ahluwalia said.
Finance Minister P. Chidambaram has said that the subsidy bill this year may rise to 2.4% of gross domestic product (GDP) from the 1.9% target set in the budget. The government has budgeted for a fiscal deficit of 5.1% of GDP in the current financial year which it’s expected to overshoot.
Ahluwalia said that fiscal credibility was absolutely important.
“We recognize that the deficit is unsustainable and will take a three-four year period to bring down,” he said. “I am less interested in the current year than in the medium term: having a credible medium-term plan for reducing fiscal deficit is important.”