New Delhi: Significantly more people now expect retail inflation to further accelerate in the near future than they did three months ago, according to a survey of households across 18 cities by the Reserve Bank of India (RBI) released on Wednesday.
This appears to have contributed to the RBI’s decision to raise policy rates by 25 basis points after a gap of four years.
The Households’ Inflation Expectations Survey for May among 5,289 households showed that 82.3% households 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% households a year ago.
“Three months ahead and one year ahead median inflation expectations rose by 90 basis points (bps) and 130 bps, respectively, as compared with the March 2018 round," RBI said.
Retail inflation rose sharply to 4.6% in April against 4.3% a month ago, suggesting a hardening of underlying inflationary pressures.
Though RBI 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 central bank said crude oil prices have been volatile recently and this imparts considerable uncertainty to the inflation outlook—both on the upside and the downside.
Since the monetary policy committee’s meeting in early April, the price of the Indian basket of crude surged from $66 to $74 a barrel.
Among several other risks, RBI highlighted the global financial market developments and the significant rise in households’ inflation expectations which could feed into wages and input costs in the coming months.
“Manufacturing firms polled in the Reserve Bank’s IOS (Industrial Outlook Survey) reported input price pressures and an increase in selling prices in Q1:2018-19. Firms polled for the manufacturing PMI (Purchasing Managers’ Index) in May also showed a sharp increase in input and output prices. Farm inputs and industrial raw material costs have risen sequentially. Wage pressures in the rural sector moderated; however, those in the organised sectors remained firm," RBI said in its monetary policy statement.
As the summer sets in, more households (67.5%) now expect food inflation to rise faster than non-food inflation in the next quarter against the opposite expectation in the previous survey.
Category-wise, it is the self-employed and daily workers who have the highest median inflation expectation looking three months ahead while the financial sector and other category have the least inflation expectation.
Inflation expectation also rises with age, with 55-60 year olds quoting the highest number while below 25 years expecting the lowest inflation across the age group.
Among cities, Chennai expects the highest inflation level in the next three months, while Bengaluru expects the lowest.