Tackling food inflation remains biggest challenge: ING Vysya Bank

Government will need to undertake immediate measures to tackle food inflation

June 17, 2014 11:22 IST | India Infoline News Service
In contrast to the encouraging trend witnessed in the retail inflation data released last week, WPI inflation surged to the highest level in the past 5 months by 6.01% YoY in May, completely surprising the markets with a consensus of 5.3%.

To add to the worries, the final estimate of March WPI was revised up by 30bps to 6%YoY.The May headline surged by 0.8% MoM (from -0.06%MoM in April), the highest pace in the past 8-months.

The inflation acceleration has primarily been driven by across the board sequential gains in food, fuel and core inflation.

Food inflation surged to 9.5% YoY in May compared to 8.6% YoY in April, registering a 2.3% MoM increase.

Broad based pick up in food prices
Fuel inflation recorded 10.5% YoY compared to 8.9% in the previous month, partly led by unfavourable base effect and partly due to sequential gains in price of electricity and diesel.
Even the core inflation inched up sharplyto 3.8% YoY compared to 3.4% YoY in the previous month.

Core inflation picks up to 3.8%

Going ahead, tackling food inflation would remain the biggest challenge facing the new government, especially with the risk of deficient monsoon on the rise, Upasna Bhardwaj, Economist, ING Vysya Bank said.

Inflationary expectations are highly correlated with food inflation, which in turn feeds into the headline inflation. It will be crucial for the government to undertake immediate measures to ease some of the supply shocks in the near term and at the same time putting in place a framework to tackle long-term structural bottlenecks. We expect the government to release the excess food stocks to offset partly the rise in price in the event of deficient rains, Bhardwaj added.

The Food Corporation of India currently has around 70 million tonnes (almost double of the required buffer norms) of food grains in stocks. In this context, the Prime Ministers focus on a tough Budget to ensure fiscal discipline to tame inflation next month may well be the right move.

RBI likely to keep policy rates unchanged through 2014
Inflation trajectory in the next few months is likely to remain volatile on account of pressure on food prices. Additionally, uptick in oil prices due to geopolitical tensions may further raise the pressure on import inflation. RBI thereby should remain rather cautious and maintain a status quo on policy rates through 2014, Bhardwaj concluded.

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