Bumpy Ride Ahead for Economy as Inflation Accelerates

Rising well above the Reserve Bank of India’s (RBI) medium-term inflation target of 4 per cent, retail inflation accelerated to a 15-month high in November amid the ongoing seasonal surge in vegetable prices and an unfavourable base effect from last year.

According to Central Statistics Office (CSO) data released, retail inflation accelerated to 4.88 per cent in November over the same month last year. CPI Inflation in October had stood at 3.58 per cent, while it was at 3.28 percent in September.

As per the data, the surge in inflation was led by a 22.5 per cent rise in the prices of vegetables. Higher vegetable prices have kept India’s inflation on the rise since July, after hitting an all-time low. Rising oil put further pressure on inflation. Brent crude prices increased 9.1 per cent month-on-month during November. According to analysts, this has affected fuel inflation and spilled over to the transport category.

Adding to the economic woes, the industrial output hit a three month low as it continued to witness a negative trend and fell 2.2 per cent on annual basis in October.

Data showed that subdued performance of mining and manufacturing sectors coupled with a contraction in output of consumer durable weighed on the industrial output. This shows that the turnaround in investment and demand is yet to resume in earnest. The same data last year registered a positive trend of 4.2 per cent. The alarming figures come in the aftermath of the slowed GDP figures earlier this year.

Headline inflation has already breached the central bank’s revised forecast that consumer prices will range between 4.3-4.7 per cent for the rest of the current fiscal. The RBI had held interest rates steady during its December monetary policy warning of upside risks to inflation and marginally increasing its estimates. The central bank noted that the moderation in core inflation, which excludes food and fuel prices, seen in the first quarter, has now reversed. As per Economists, RBI is likely to hit the pause button on interest rates for the remainder of the current fiscal.

Further, the impact of the reduction in GST rates on a number of items may pass through into retail prices and inflation in the coming weeks. However, the continued impact of the HRA revision on housing inflation and elevated fuel prices suggest that the CPI inflation is likely to be in a range of 4.4-4.7 per cent in the remainder of FY2018.

Latin Manharlal Group