Wholesale price index spike may hit consumer price index with lag: Economists – The Economic Times

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India’s wholesale inflation rose to a near 11-year high of 10.5% in April, data released on Monday showed. By contrast, retail inflation, as measured by the consumer price index (CPI), eased to 4.29% in April, from 5.52% in March, remaining within the Reserve Bank of India’s (RBI) target band of 2-6% for the fifth straight month.

The sharp spike in the wholesale price index (WPI) in April is likely to spill over to retail inflation with a lag, but a normal monsoon and lower food inflation may moderate the impact, economists said. Retail inflation is expected to remain in the 5-5.5% range in the near term but could pick up toward the end of the financial year, they said. The meteorological department has forecast a normal monsoon this year.

India’s wholesale inflation rose to a near 11-year high of 10.5% in April, data released on Monday showed. By contrast, retail inflation, as measured by the consumer price index (CPI), eased to 4.29% in April, from 5.52% in March, remaining within the Reserve Bank of India’s (RBI) target band of 2-6% for the fifth straight month.

Economists expect convergence in wholesale and retail inflation going ahead as higher commodity and fuel prices lead to a cost push in retail inflation.

‘Temporary Moderation’
“We see the April moderation in retail inflation as temporary, as there is a limit to how low perishables can go,” said Rahul Bajoria, chief India economist, Barclays. “Fuel prices have started to rise and non-perishables remain elevated.”

Bajoria has projected CPI will rise to 5.4% in May and expects upside risks to inflation forecasts as increasing global commodity prices may pose challenges.

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“The sudden surge in WPI due to commodity prices is yet to find its reflection in CPI. The pressure is there and it will come with a lag,” said Sunil Kumar Sinha, principal economist, India Ratings & Research. However, the impact of higher fuel prices and rising input costs for manufactured goods may be muted by lower inflation in food prices.

“We expect CPI to remain in the 5-5.3% range in the rest of this quarter, after which it should remain in the 4-5% range over the next six months with a possibility of one reading heading below 4% in Q3 ,” said Upasna Bhardwaj, economist, Kotak Mahindra Bank.

QuantEco Research economist Vivek Kumar said, “While there is a possibility that monthly CPI inflation print moves towards 5.5% in the next few months, on an average basis, retail inflation is expected to moderate to 5% in FY22, down from 6.2% in FY21.”

Monetary policy
The near-term relatively benign CPI trajectory will allow the RBI’s monetary policy committee (MPC) to continue prioritising growth over prices for some more time. The MPC, which gives more weight to retail inflation, is also likely to watch the vaccine rollout and the June quarter GDP numbers while firming up its interest rate policy. However, the committee could later revert to its inflation mandate as growth gains pace and the possible pass-through of higher input prices begins showing up.

“No rate cuts are likely because of the inflation pressure, and no increase in rates is expected because the bank has to support growth,” Sinha said. “We don’t expect any changes in policy rates in calendar 2021 but the MPC will maintain its accommodative stance and adequate liquidity.”

At its last policy meeting held in April, the MPC had kept the repo rate unchanged for the fifth time in a row at 4% while maintaining its “accommodative stance” as long as necessary to mitigate the impact of the pandemic.

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