Inflation at 5-month high, price monster to test PM Modi

Wholesale prices in May rose sharply to a five-month high, adding to worries that a weak monsoon and disruptions in oil supplies from Iraq could undermine the new government’s efforts to curb inflation.

Wholesale prices in May rose sharply to a five-month high, adding to worries that a weak monsoon and disruptions in oil supplies from Iraq could undermine the new government’s efforts to curb inflation.

A-vegetable-seller-waits-for-customers-at-a-market-in-Ahmedabad-Higher-food-and-fuel-prices-pushed-up-the-wholesale-price-index-to-6-01-in-May-Reuters-photo

Higher food and fuel prices pushed up the wholesale price index to 6.01% in May compared to 5.20% the month before, government data showed on Monday. Prime Minister Narendra Modi swept to power last month on the promise of lowering prices and reviving the economy growing at its slowest since 1980s.

If prices remain at elevated levels, Reserve Bank of India governor Raghuram Rajan, who indicated in his monetary policy on June 3 a willingness to consider a rate cut to kick start sputtering growth, will find it difficult to give up his hawkish stance on curbing inflation. Result: EMIs are unlikely to come down in the near future.

Rising wholesale prices negated the feel-good factor that was beginning to emerge following last week's data that showed retail inflation easing to 8.28% in May and industrial output rising to a 13-month high of 3.4% in April.

Reflecting the negative mood, the BSE Sensex fell for a second straight session to its lowest close in 1-1/2 weeks after the release of the inflation on Monday, although some risk-aversion also hit the market due to the crisis in Ukraine and Iraq. The rupee also hit a 1-1/2 month low during the day.

Food inflation rose sharply to 8.58% in May compared to 7.06% in April, fuelled mainly by high inflation in potatoes (up 31.44%), fruits (up 19.4%), rice (up 12.75%) and meat, fish & eggs (up 12.47%).

"Tackling food inflation should take centre stage in order to bring growth back to the economy," said Chandrajit Banerjee, director general, CII.

Deficient rains, as forecast by the meteorological office this year, could hurt farm output, especially pushing up prices of vegetables, fruits and dairy products. India has ample rice, wheat and sugar stocks to tide over any shortage this year.

Crude prices have risen to a nine-month high on anxiety over possible disruption in supplies from Iraq, where Sunni insurgents were advancing toward Baghdad as part of a campaign to establish a new Islamic Caliphate in Middle East. If crude prices keep rising, India's oil import bill, which stood at $160 billion (`9.6 lakh crore) last year, could shoot up further.

Higher demand for dollars by oil importers could lead to the US currency appreciating against the rupee, making all imports more expensive, thus, fuelling inflation and increasing India's now-under-control current account deficit (CAD - the difference between dollar inflows and outflows in the economy).

This will hit hopes of an early economic recovery. A soaring CAD last year had led to the rupee falling to 68.85 against the dollar and set off a global crisis of confidence in the Indian economy.