There are concerns that the spurt in WPI would leave the Reserve Bank of India (RBI) with little leeway to cut interest rates to revive growth. RBI should look through the WPI spike.
Wholesale price inflation (WPI) has surged, touching 10.49% in April 2021 — the highest since April 2010 — from 7.39% in the previous month. The forward march of prices comes on the back of a low base and sustained rise in fuel and commodity prices.
There are concerns that the spurt in WPI would leave the Reserve Bank of India (RBI) with little leeway to cut interest rates to revive growth. RBI should look through the WPI spike. It would be transient, given that a bulk of the price rise is due to the supply disruptions caused due to state lockdowns to contain Covid’s second wave.
Inflation will ease with the unlocking of the economy and restoration of supply chains. Of course, a pass-through to consumer prices is inevitable (even in the absence of the pandemic). Higher prices, in turn, will spur the supply chain to faster response.
The break up shows that inflation in fuel and power registered a jump to 20.9% compared to 10.3% in the previous month and –12.7% in April 2020. Global crude prices have been on a rising trajectory since mid-April 2021. Commodity prices have surged following global optimism about the Covid vaccine and economic revival in countries such as the US and China. Also, the depreciation of the rupee pushed up the landed costs. Inflation in manufactured products rose to 9% in April 2021, higher than 7.3% in the previous month.
Rightly, RBI has flagged the build-up in input price pressures across sectors, driven in part by elevated global commodity prices, as a concern. Rationalising taxes on key inputs will help. This calls for action from the Centre and state governments. Wholesale inflation in the food group climbed to 4.9% compared to 3.2% in the previous month. A normal southwest monsoon will help.