Skyrocketing onion and vegetable prices and costlier staples such as rice and wheat pushed India’s wholesale price index (WPI)-based inflation to a five-month high of 5.79% in July, putting more pressure on policymakers to take credible steps to reduce a crippling external deficit.
The headline inflation rate, which is likely to hit family budgets hard, is above the Reserve Bank of India’s (RBI’s) comfort zone of 4-5% for the first time since March. So, loans are unlikely to become cheaper anytime soon.
The latest spike in WPI inflation, which was at 4.86% in June, has largely been driven by high food prices that grew at 11.91% in July compared with 9.74% in June.
Overall on a country-wide average, vegetable prices grew 46.79% in July — up from 16.47% in June — as heavy rains and floods in Uttarakhand and other regions affected crop and disrupted supplies.
Onion prices grew 144.94% in July from 114% in June while cereal prices jumped 17.66% during the month compared with 11.18% growth in June.
The government, however, expects inflation to stabilise in the coming months.
“With currency appearing to stabilise, I don’t expect this (effect on inflation) to continue,” said Montek Singh Ahluwalis, deputy chairman, Planning Commission. “I think if we can get moderation on food front once the impact of good monsoon becomes available, I think we will end the year between 5 and 6% which we have predicted earlier.”
Higher prices are putting pressure on family budgets, especially at a time when companies, squeezed by costly input and borrowing costs, are offering meagre salary hikes and holding back expansion and hiring activities.
“Earlier we used to budget for a month. Now we have to revise the budget almost every day,” said Manju Malik, a Delhi-based homemaker.
The sharp slide in the rupee, which has fallen nearly 15% since May, is likely to knock up prices of almost everything from farm to fork, effectively negating gains from a potentially bountiful summer harvest.
The rupee is hovering above 61 to a dollar, despite a string of recent steps taken by the Reserve Bank of India to stem its fall.
India’s factory output fell 2.2% in June, its second monthly decrease, underlining how India is stuck with the toxic combination of low growth and high inflation.
Making borrowing more expensive by raising interest rates may address the issue of higher prices and would help arrest a fall in the rupee, but would likely hurt growth further.
According to analysts, consumers, hit by flat income growth and costly bank lending, are putting off purchases of durables such as cars and TVs. This will help temper down demand and tame inflation.
Retail price data, which was released last week, broadly mirrored similar trends with shop-end prices of vegetables and cereals soaring sharply in July.
“Even as demand remains weak, a weaker rupee is resulting in a sharp rise in input costs,” said Sonal Varma, economist at broking and research firm Nomura. “We do not expect a sustained rise in WPI inflation due to very weak demand.”