MUMBAI: Global analytical company Crisil said on Monday that its research expects headline inflation, measured by the consumer price index (CPI) to rise 60 basis points (bps) to 4% this fiscal from 3.4% in fiscal 2019.
This base case assumes food inflation rising to 3% from an abnormal low of 0.1%. To be sure, this is a largely statistical low-base effect at play.
However, the rise in food prices may well remain subdued on a sequential basis for two reasons. One, the Indian Meteorological Department has suggested a well-distributed monsoon this year.
Two, global food prices are expected to decline in 2019, as projected by the International Monetary Fund and World Bank.
The CPI-based gauge has now undershot the Reserve Bank of India (RBI)'s the medium-term target of 4% for two straight fiscals. The sharp decline in fiscal 2019 left analysts scratching their heads.
In a report titled 'Whither inflation?' Crisil proffered two inflation scenarios for this fiscal. If monsoon plays truant, especially in light of an El Nino event, food inflation could surge.
Fuel inflation could follow suit if the current uptick in international crude prices persists. Also, core inflation (the part of headline inflation sans food and fuel) could strengthen further on account of the government's consumption-oriented policies.
Together, these could push headline inflation up to 5%.
On the other hand, inflation could be lower at 3.5%. That would happen if the food inflation remains low for longer, core softens as a result of the lagged impact of economic slack, and government spending remains restrained.
"Our study of the main components of headline inflation and their trends over the past three decades confirms that food has been the main retarding factor," said Dharmakirti Joshi, Chief Economist at Crisil Ltd.
Core inflation, which is supposed to be a better gauge of demand-side pressures in the economy, has been fairly sticky downwards, irrespective of economic cycles.
Fuel, on the other hand, appears to be the most volatile. But given its low weight in the CPI basket, its direct influence on headline inflation is limited, he said.
This story has been published from a wire agency feed without modifications to the text.