Home / Politics / Policy /  The threat of inflation returns

New Delhi: Key macro-economic concerns resurfaced on Tuesday as both retail and wholesale price inflation accelerated in March because of rising food prices after a three-month decline, even as a private forecast warned of below-normal rains during monsoon due to the impact of the El Nino weather phenomenon.

While the Consumer Price Index-based inflation accelerated to 8.31% in March from 8.1% a month ago, Wholesale Price Index-based inflation also quickened to 5.7% from 4.68% in the same period.

The latest data maintains pressure on the Reserve Bank of India (RBI) to keep policy rates high and increases the challenges for the next government, which is due to take charge by May end after conclusion of the general election.

Arguing that tackling lower economic growth, high inflation, and large fiscal deficits are some of the key challenges for the next government, credit rating agency Standard and Poor’s (S&P) said on Tuesday that India’s sovereign ratings can be affected more by the direction and pace of policy reforms than the political party that takes control after the general election.

“Steps to ensure low food inflation and commitment to fiscal restraint will be critical to manage inflation expectations. Better coordination between the government and RBI can ensure smooth transition to a period of low inflation. In our view, India requires reforms to boost agricultural productivity, increase efficiency of the food supply chain, and rationalize increases in minimum support prices and rural wages," it said.

S&P currently assigns the lowest investment grade rating (BBB-) to India with a negative outlook.

It said the election and subsequent policy actions could decide if the sovereign rating remains investment grade. “If we revise our sovereign outlook to stable, those negative outlooks on banks and corporate entities, which reflect the sovereign outlook, could also be revised to stable," it added.

S&P said the combination of slower growth and a rising subsidy burden in India could undermine the sovereign rating support further.

“If slow growth continues, revenue growth could also decelerate. And as developed economies’ growth regain traction, both interest rates and commodity prices are likely to rebound. The resulting increases on interest payments (a major government expenditure for the heavily indebted Indian government) and subsidies could further squeeze the country’s already-limited budgetary space," it added.

Economic growth in the fiscal ended 31 March is estimated by RBI at less than 5% against 4.5% in the year ago.

Glenn Levine, senior economist at Moody’s Analytics, said in a note that rising inflation prints suggest that inflationary pressures remain elevated.

“There will most likely be no further rate increases in the current cycle, but any previously small chance of a near-term rate cut is now off the table completely," he added.

RBI governor Raghuram Rajan kept the policy rate unchanged at 8% in the first bimonthly credit policy announced on 1 April, suggesting rates may not be hiked further in the near term if the economy continued along the disinflationary “glide path".

Since September 2013, RBI had hiked the repo rate—at which it lends overnight funds to commercial banks—thrice by a total of 75 basis points (bps), refusing to lower its guard against inflationary threats, which have been a major concern for the central bank the past few years.

One basis point is one-hundredth of a percentage point.

Economists expect Rajan to hold rates only if retail inflation sticks to a road map recently suggested by an expert panel headed by RBI deputy governor Urjit Patel—8% by January 2015 and 6% by January 2016—enduring a host of potential risks.

These include the performance of the monsoon, the impact of El Niño and uncertainty over the setting of minimum support prices for agricultural commodities and administered prices of fuel, fertilizer and electricity.

India may receive below-normal rains this monsoon between June and September as the El Niño evolves with the warming of the central and east Pacific Ocean, private forecaster Skymet Weather Services Pvt. Ltd said on Tuesday.

Madan Sabnavis, chief economist at Care Ratings, said El Niño, which typically causes a decline in monsoon rainfall, posed a major upside risk to inflation. “This will in turn affect agricultural produce, thereby raising pressure on food prices. Hence, it appears as if food prices might remain a concern in FY15. Any rise in food inflation will impact CPI to that effect as well," he said.

In its “macroeconomic and monetary developments" update released along with its bimonthly monetary policy review, RBI said the disinflationary process is already underway with the headline inflation trending down in line with the glide path laid down by the Urjit Patel committee, though inflation was well above comfort levels.

“Going forward, inflation may moderate in the context of relatively stable crude oil and range-bound global commodity prices next year. On the other hand, food inflation will depend on the onset and spatial and temporal distribution of the south-west monsoon," it said.

RBI added that the timing and magnitude of revisions in administered prices, particularly of electricity and coal, will also affect the trajectory of inflation in 2014-15. Wholesale price-based food inflation rose to 9.9% in March from 8.12% in February. During the same period, retail food inflation quickened to 9.1% from 8.57%. WPI-based inflation for January was also revised to 5.17% from the provisional figure of 5.05% released earlier.

With the March data, retail inflation for fiscal 2014 declined to 9.49% from 9.8% a year ago while wholesale price-based inflation decreased to 6.17% from 7.4%. Credit rating agency India Ratings said in a note that though the decline in average annual inflation is good news, the battle against inflation is far from over as seasonal spikes in fruits and vegetable prices along with a sustained price increase in some food items remain a cause of concern. “This erodes the purchasing power of large sections of the society, which are vulnerable," it added.

Catch all the Politics News and Updates on Live Mint. Download The Mint News App to get Daily Market Updates & Live Business News.
More Less
Recommended For You
Get alerts on WhatsApp
Set Preferences My ReadsWatchlistFeedbackRedeem a Gift CardLogout