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11 June 2018
 |
| inflation(The Total Investment & Insurance Solutions) |
India’s retail inflation jumped further
in May to a four-month high, primarily driven by a surge in energy prices,
according to a Reuters poll of economists, suggesting more
policy tightening from the central bank is coming.
On 6 June, the Reserve Bank of India (RBI)
raised the repo rate for the first time since 2014, by 25
basis points to 6.25%, as recent data showed significant increases for both
inflation and growth. But the central bank kept its “neutral” policy stance
unchanged. The Total Investment &
Insurance Solutions
Mounting price pressure is a concern for the
RBI, with its own projections for inflation raised compared with the ones made
in May.
The poll of more than 30 economists taken 4-8
June showed annual consumer price inflation likely increased to 4.83% last
month, the highest since January and above April’s 4.58%. The Total Investment & Insurance
Solutions
If that predicted pace is realised, May will
be the seventh month in a row with inflation higher
than the RBI’s medium-term target of 4%.
“Consumer price inflation is likely to have
accelerated in May, due in large part to a rise in fuel inflation,” noted
Shilan Shah, a senior India economist at Capital Economics. “Core inflation
will also have remained elevated, and this is likely to be the case for some
time.” The Total Investment &
Insurance Solutions
Poll forecasts for the data, due to be
released on Tuesday 12 June at 5.30pm, ranged from 4.1% to 5.7%. The Total Investment & Insurance
Solutions
Oil prices hit a 3-1/2-year high last month,
led by increasing worries of supply constraints from US President Donald
Trump’s decision to withdraw from the 2015 Iran nuclear agreement. The Total Investment & Insurance
Solutions
India imports almost 80% of its oil needs and
that surge poses a threat not just to inflation but also to the recovering
economy, which still is the fastest-growing major economy. The Total Investment & Insurance
Solutions
“Rising crude prices would not only impact
headline inflation but would also put pressure on price levels as the twin
deficit goes up,” noted Kunal Kundu, an economist at Societe Generale,
referring to India’s budget and current account gaps. The Total Investment & Insurance Solutions
The government’s plan to increase rural
spending and the minimum support price for farmers ahead of general elections
next year will exacerbate price pressures, and is likely to blow out the fiscal
deficit target.
What has also not helped is the weakening
rupee, which has shed 5.7% against the dollar this year. The Total Investment & Insurance Solutions
The currency’s fall is also inflationary, and
increases concern about capital outflows from Asia’s third-largest economy -
another reason that some expect more rate hikes by the RBI. The Total Investment & Insurance
Solutions
The poll also showed the wholesale prices
index likely hit a six-month high of 3.82% in May. The Total Investment & Insurance Solutions
“The outlook for core inflation suggests that
(the 6 June) rate hike by the central bank marks the start of a modest
tightening cycle rather than being a case of a one-off move,” noted Shah. “We
are penciling in two further 25 basis point increases in the repo rate over the
next six months or so.”
The poll also predicted industrial output to
have risen 5.2% in April from a year earlier, up from 4.4% in March. That was
likely driven by the increase in output of eight core factories - which account
for nearly 40% of total industrial production - by 4.7% in April from a year
earlier. The March increase was 4.4%.The
Total Investment & Insurance Solutions
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