The first month of the current financial year has brought some bad news on the inflation front with both retail (Consumer Price Index or CPI) and producer (Wholesale Price Index or WPI) inflation showing a surge raising the possibility of a policy rate hike by the Reserve Bank in the near future.

A statement issued by the Ministry of Statistics and Programme Implementation revealed that an increase in fruit and vegetable prices, coupled with egg prices, has pushed CPI to 4.58 per cent in April, from 4.28 per cent in March. The Consumer Food Price Index, however, was a tad lower at 2.8 per cent in April, from 2.81 per cent in March. The latest number has put a break on slide in CPI since January this year.

Aditi Nayar, Principal Economist with ICRA, said the uptick in the year-on-year CPI inflation in April, relative to March was led by a broad-based rise for miscellaneous items, as well as clothing and footwear, housing and pan, tobacco and intoxicants. The sharp month-on-month rise in all the indices of miscellaneous items suggests fairly widespread resetting of prices at the beginning of the fiscal.

Echoing the same sentiment, Shubhada Rao, Chief Economist with YES Bank, said the latest number is in line with expectation of CPI inflation printed at 4.58. The key drivers of the April number were food and beverages that have turned positive after 4 months of contraction. Other drivers were related to miscellaneous, that has across board seen hardening of inflation led by education, household goods, personal care and fuel commodities like petrol and diesel. Importantly, core inflation at 5.9 per cent is at 44-month high.

Both Nayar and Rao expect rates to go up. Nayar said the risk posed by the sharp rise in crude oil prices could cause the CPI inflation trajectory to modestly exceed the forecast made by the Monetary Policy Committee of 4.7-5.1 per cent for first half of financial year 2019.

“While some MPC members may vote for a change in the stance in the June 2018 policy following the upside surprise in the headline and the core CPI inflation, we see a limited likelihood of a rate hike until there is greater clarity on various inflation and fiscal risks, which may emerge by August 2018,” she said.

At the same time Rao expects the CPI trajectory to move north with international crude prices firming up and likely remaining elevated as also by MSP-led food inflation. “We maintain our estimate for FY19 at 4.7 per cent with upward bias. The positive support could come only if we have a solid monsoon performance giving a bumper food grain output,” she said.

Wholesale Price Index

WPI for the month of April touched a four-month high of 3.18 per cent as against 2.47 per cent in the month of March. This rise was mainly due to an unfavourable base effect besides rise in food prices as well as the partial pass through of rising global crude oil prices. Experts believe that uptrend in food prices will continue considering that the new Minimum Selling Price (MSP) formula will come into effect from this Kharif season.

Commenting on the WPI number, Jaikishan J Parmar, Research Analyst with Angel Broking, said it would be interesting to see the RBI response to the WPI numbers although the RBI still goes by CPI inflation and the inflationary expectations. However, “with the implementation of GST, the WPI inflation tends to get translated into higher CPI inflation without any lag effect. While rate cuts may be ruled out for now, it is very likely that the lower IIP number combined with higher inflation may impel the RBI to adopt a neutral stance on interest rates and let the exchange rates make the necessary adjustment,” he said.

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