Food and fuel were largely to blame for the re-acceleration in headline CPI, while it was more broad-based in the case of WPI. Fruit and vegetable prices rose again as the normalization of supply has run its course. But, the pickup was also reflective of the broader underlying inflation pressures in the supply constrained economy. Looking ahead, inflation is likely to remain sticky and could get a lift if the El Nino leads to a dry spell and geopolitical uncertainties pump up international commodity prices. This will keep the RBI on its toes, HSBC Global Research said.
CPI inflation rose to 8.3% y-o-y in March (vs. 7.9% in February). This was in line with consensus expectations but slightly above our 8.1% estimate.
- On the other hand, WPI inflation surprised on the upside (5.7% y-o-y in March vs. 4.7% in February), coming above market and our expectation of 5.3%, HSBC said.
- On a sequential seasonally adjusted (sa) basis, WPI inflation was unchanged at 0% m-o-m (vs. -1.3% contraction in February)
- The re-acceleration in CPI was driven by food (9.1% y-o-y vs. 8.6% in February) and fuel (6.3% y-o-y vs. 6.1% in February).
- Within food, prices of vegetable, fruits and pulses drove the increase.
- Fortunately, core CPI (ex food and fuel) moderated marginally (7.8% vs. 7.9% in February), but remains elevated. Within core CPI, the deceleration was wholly driven by transport & communication' and 'others'. All other components within core pulled in the other direction
- Meanwhile, the pickup in headline WPI inflation was led by all major sub-components of the index. Inflation in primary articles (7.7% y-o-y vs. 6.3% in February), energy (11.2% y-o-y vs. 8.7% in February) and manufacturing (3.2% y-o-y vs. 2.8% in February) picked up during the month.
- Core WPI (non-food manufactured goods) rose to 3.5% y-o-y (vs. 3.1% in February). On a sequential basis, core inflation eased a tad to 0.3% m-o-m sa vs. 0.5% in February.
The disinflationary impact from improved food supply is now behind us and the inflation print for March also showed that broader underlying inflation pressures are still firm.
Looking ahead, a dry spell this year due to El Nino could push up food inflation. The last time we had poor weather due to El Nino was in 2009 and food inflation average 14% then. If food inflation goes back to these levels from 9% presently, it could potentially add up to 2.5ppts to headline CPI.
The monthly INR 0.5 per litre increase in diesel price is set to continue for another year or so, provided international oil prices and the exchange rate are unchanged, and the new government does not change fuel price policies. This will continue to add to cost and, therefore, inflation pressures. Moreover, the lingering geopolitical tensions pose upside risks to international commodity prices.
The RBI has little control over food and fuel prices, but it is the second-order impact of higher food and fuel that the RBI will look to contain. Moreover, there is little, if any, slack in the supply-constrained economy. The RBI is likely to remain in wait-and-see mode for now, but will may eventually need respond by tightening policy rates further to contain upside risks to inflation and to bring inflation to 6% or below by early 2016 if it sticks to the Patel Committee's recommended glide path.
Bottom line: Inflation picked up after months food driven disinflation. Looking ahead, El Niño and geopolitical uncertainties are additional risks to inflation that have emerged in recent months, which should keep the RBI singing a hawkish tune and possibly hike policy rates further.
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