Retail inflation accelerates to four-month high of 4.87% in May
Consumer price (CPI) inflation in May rose for the seventh straight month, remaining higher than the central bank’s medium-term target of 4%.business Updated: Jun 12, 2018 22:40 IST
Consumer price inflation accelerated at the fastest pace in four months in May, driven by higher fuel prices and a depreciating rupee, official data released on Tuesday showed, reinforcing the possibility of another interest rate increase by the Reserve Bank of India (RBI) in August.
India’s annual retail inflation quickened in May to 4.87%, from April’s 4.58%.
Fuel prices have increased in line with rising crude oil prices.
A depreciating rupee makes imported goods more expensive. Analysts polled by Reuters had forecast May’s inflation rate, measured by the Consumer Price Index, at 4.83%.
Even core inflation, which excludes often volatile food and fuel prices, quickened to 5.95% in May from 5.7% in April, mirroring higher prices of manufactured goods.
So far in 2018, retail prices of petrol have climbed 9.2% and diesel by 13.7% in Delhi.
The rupee has depreciated 5.3% against the dollar since January 1, pushing up the prices of imported items such as electronic goods and machinery.
Industrial output grew 4.9% in April compared to a five-month low of 4.4% in March, a separate data set released by the government showed. Economists had forecast output growth of 5.2%.
The monetary policy committee of the RBI, which is targeting a medium-term inflation rate of 4%, on June 6 raised the key repurchase rate, at which it lends money to commercial banks, by 0.25% to 6.25%. The latest inflation data makes it likely that the committee will raise the rate again at its next monetary policy announcement on August 1.
“Predicting the exact path of headline inflation is difficult given the volatile nature of food and fuel prices. However, one thing that does look likely is that the core inflation will stay elevated. Even if the economy just maintains its current momentum, capacity utilisation would tighten further, which will boost the underlying pressure,” said Shilan Shah, senior India economist at Capital Economics, a consulting firm. “In terms of what this means for policy, the Reserve Bank of India hiked its repo rate by 25 basis points last week, and we think that the rise in inflation last month as well as the outlook for underlying price pressures will pave the way for further modest policy tightening over the next six months or so.”
One basis point is one-hundredth of a percentage point.
May was the seventh straight month in which inflation was higher than the RBI’s medium-term target. The RBI has revised up its inflation forecast to 4.7% for the second half of the current fiscal year ending in March 2019, from 4.4% seen earlier.
It is crucial for the government that inflation remains benign ahead of a string of state elections leading up to general elections in 2019. Opposition parties have flagged concerns about rising fuel prices, which tend to have a cascading effect on the entire economy because of their impact on the cost of transport of goods.
“Inflationary pressures are building up in the economy,” said Tushar Arora, senior economist at HDFC Bank. “The possibility of one more rate hike cannot be ruled out this year.”
Oil is India’s biggest import and an increase in oil prices pushes up inflation up and widens the trade deficit, putting pressure on the rupee.
Annual retail food inflation, which contributes about half of the weight in the CPI, remained muted, helped by forecast of normal monsoon rains this year. It increased 3.1% in May compared with a 2.8% rise in the previous month.
“The uptick in the headline and core CPI inflation is in line with our forecast, reflecting an unfavourable base effect for food prices and higher inflation for fuel and light as well as transport and communication, mirroring the hardening of crude oil prices. Headline inflation remains on track to cross 5% in June 2018,” said Aditi Nayar, principal economist at Icra Ltd, a credit rating agency.
At the stock markets, the euphoria of the Singapore summit meeting between US President Donald Trump and North Korean leader Kim Jong-un, who pledged to work for the denuclearisation of the Korean peninsula, overshadowed local concerns .
The BSE Sensex rose 209 points to close at 35,692.524 and the broader National Stock Exchange Nifty gained 55.90 points, or 0.52%,to end at 10,842.85. The are the highest closes for the two indices since February.