ADB raises inflation forecast for India to 5% for current fiscal year

New Delhi: The Asian Development Bank (ADB) has raised its inflation projection for India to 5% from 4.6% for this financial year, blaming higher crude oil prices, depreciation of the rupee and increase in minimum support prices.

In a supplement to the Asian Development Outlook (ADO) released in April, ADB said on Thursday that the upward revision “responds to higher oil prices, significant depreciation of the Indian rupee in the past few months, and generous increases announced on 4 July in minimum support prices for summer crops, by which the government intervenes in markets to protect agricultural producers from any sharp fall in farm prices.”

The International Monetary Fund had on Monday lowered its growth projection for India by 10 basis points to 7.3% citing higher oil prices and speedier interest rate increases by the Reserve Bank of India (RBI) due to higher than expected inflation.

However, ADB said India is expected to achieve its earlier growth forecasts of 7.3% in 2018-19 and 7.6% in 2019-20 as bank-strengthening bolsters private investment and benefits kick in from the goods and services tax (GST), while maintaining that increases in oil prices pose a downside risk to growth. In 2017-18, the Indian economy grew at 6.7%.

ADB said growth gained momentum in Q4 of 2017-18 as GDP expansion reached 7.7%, the highest rate since Q1 of 2016-17. It said in the first half of FY2019, the growth rate is expected to benefit from a low base.

“Other key drivers of growth include an uptick in public consumption, which is typical before elections, and a recovery in exports following shortages of working capital related to a new goods and services tax. Private consumption is expected to grow at a healthy rate as disruption caused by demonetization in 2016 fades. Capacity utilization rates are at their highest in 4 years and should provide incentives to firms to invest,” the Manila-based bank said.

In June, India’s wholesale price inflation shot up sharply to a five-year high of 5.77% while retail inflation quickened to a five-month high of 5%. Many analysts now do not rule out RBI going for another round of rate hike next month in its policy review on 1 August. RBI on 6 June raised the repo rate by 25 basis points to 6.25%—the first rate hike in more than four years—citing higher risks from rising inflation.

Though RBI has marginally revised its inflation projection downward to 4.85% for April-September from 4.9% projected earlier, it revised upward its inflation forecast for October-March period to 4.7% from 4.4% estimated earlier, “with risks tilted to the upside.”

The Households’ Inflation Expectations Survey for May among 5,289 households showed that 82.3% of them expect inflation to accelerate in next three months, against 80.2% in March. Similarly, for the year ahead, 91.1% households now foresee inflation accelerating against 90.8% a year ago.

Fears of a global supply crunch following outages in Libya and Venezuela have led to an almost 5% jump in crude oil prices since April when ADB released its ADO. Oil prices on Thursday extended gains from the previous session touching $73 per barrel, buoyed after official data showed that US inventories of gasoline, diesel and heating oil unexpectedly fell last week.

The Economic Survey 2017-18 presented on 29 January had estimated that every $10 per barrel increase in the price of oil reduces economic growth by 0.2-0.3 percentage points, increases wholesale inflation by about 1.7 percentage points and widens the current account deficit by about $9-10 billion.

While the monsoon has gained pace earlier than expected, nationwide rainfall deficit in the season stood at 4% till Monday. Although the India Meteorological Department has projected a normal monsoon this year, its distribution and intensity in July will be crucial for kharif crop output, which in turn will impact food inflation.

After a modest hike over the past four years, significant increases in MSPs across crops on 4 July are likely to add 70 basis points to retail inflation, according to India Ratings and Research.