Prices of many commodities have surged amid global optimism about the covid vaccine rollout and a sharp economic revival in key commodity consumer countries such as the US and China
Wholesale inflation galloped to double digits in April, the fastest in 11 years, because of higher oil and commodity prices and a low base effect, leaving the central bank with little leeway to cut interest rates to spur faltering growth.
Data released by the commerce ministry on Monday showed Wholesale Price Index (WPI) based inflation quickened to 10.49% in April from a contraction of 1.7% in the year-ago period. While food inflation accelerated by 4.92%, inflation for fuel and manufacturing items quickened to 20.94% and 9.01%, respectively. Core inflation, excluding food and fuel prices, shot up to a record 8.4% in April.
Prices of many commodities have surged amid global optimism about the covid vaccine rollout and a sharp economic revival in key commodity consumer countries such as the US and China, while landed costs were pushed up by the depreciation in the rupee.
In sharp contrast, retail inflation eased to a three-month low of 4.29% in April, data released last week showed. However, retail inflation may also see upward pressure with rising input cost and supply-side disruptions. “Unlike last year when producers benefited from reducing input cost pressures, this year they are likely to witness margin pressure with higher commodity cost. The sharp rise in core WPI inflation indicates a rise in cost-push pressures from wholesale prices to retail prices," IDFC Bank said in a research note on Monday.
Aditi Nayar, chief economist at ICRA Ratings, said there is a growing divergence in terms of the global optimism related to the vaccine rollout, which is pushing up commodity prices and the weaker domestic sentiment, engendered by the continuing impact of the second wave of covid infections in India. “The likely trajectory of the WPI inflation supports our view that there is no space for rate cuts to support the faltering growth momentum, even as we expect the monetary stance to remain accommodative. We expect the headline WPI inflation to rise further to 13-13.5% in the current month before commencing a downtrend, whereas the core-WPI inflation may continue to rise over the next three prints to a peak of 10.5%," she added.
The central bank is expected to keep the policy rate unchanged and will certainly maintain an accommodative stance to ensure ample liquidity and keep long-term interest rates from rising, the Asian Development Bank said last month. “While inflation will stay within the target range, upward pressure on bond yields may come from the large fiscal deficit, the government’s aggressive borrowing programme in FY21, and higher global bond yields. Large capital inflow poses a challenge to the central bank as it strives simultaneously to maintain price and exchange rate stability and set interest rates that facilitate economic recovery," it added.
Escalating covid cases have overwhelmed India’s health system, forcing many states to announce lockdowns, which may delay a strong recovery in domestic economic activity. Moody’s Investors Service on Tuesday slashed its FY22 economic growth forecast for India to 9.3% from 13.7% estimated earlier, citing the negative impact of the second wave of coronavirus pandemic. S&P Global Ratings last week said it expects India’s GDP growth at 9.8% under its moderate scenario and to 8.2% under the severe scenario based on when the current infection wave peaks.
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