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CPI-based inflation for May likely to fall below April’s 2.99%

LiveMint logoLiveMint 12-06-2017 Vaswati Hazarika

New Delhi: The retail price inflation as measured by the Consumer Price Index (CPI) is expected to further decline in May from 2.99% in April due to lower prices of pulses, cereals and perishable goods, which may put pressure on the Reserve Bank of India (RBI) to change its policy stance to accommodative from neutral at present.

The CPI data is scheduled to be released later on Monday.

“Inflation will have to go below 2% for the central bank to cut rates,” said A. Prasanna, chief economist of ICICI Securities Primary Dealership Ltd. “There would not be any effect of a rate cut at this point due to the excess liquidity of Rs4 lakh lying with the RBI,” he said.

“CPI Inflation will stay low till July, greater chance of it falling in May to a new low of 2.58%,” said D.K. Joshi, chief economist of Crisil.

It is expected that the headline retail inflation will fall till July because of a higher base during the same period last year. After July, economists believe retail Inflation is likely to see an increase.

The India Meteorological Department has projected an average normal rainfall of 98%, with forecasts of rainfall in drought prone areas, especially Karnataka and Tamil Nadu. However these areas haven’t received heavy rainfall except for slight drizzles, bringing relief from the scorching summer heat as of now. Lack of rainfall will indeed increase food prices in the second half of the year, while a good monsoon from June to September will help keep inflation in check.

Aditi Nayar, principal economist at ICRA, said lower food inflation will dampen headline CPI inflation to a fresh series low of 2.6% in May 2017. “A continued dip in prices of some pulses after the record crop in FY2017, and unseasonal weakness in prices of perishables like vegetables would contribute to a low month-on-month momentum in prices. Core CPI Inflation is likely to ease marginally to 4.4% in May 2017 (from 4.53% in April),” she said.

Core inflation, which excludes volatile price indices of food and fuel, was at 4.53% in April.

N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy (NIPFP), said RBI is expecting short-term inflation to come down because of a fall in the prices of vegetables, pulses and other commodities like metal, which is why the retail inflation prices will again fall below 3% in May.

“In the medium term, they expect inflation to expand, which is why rate cut isn’t the very first step to follow. RBI is concerned with year-on-year inflation data and they expect India’s CPI inflation to be above 4% by the end of the financial year 2017-18,” he said.

In its latest monetary policy review, RBI said the easing of inflation, excluding food and fuel, may be transient in view of its underlying stickiness in a situation of rising rural wage growth and strong consumption demand. “Thus, the April reading has imparted considerable uncertainty to the evolving inflation trajectory, especially for the near months. If the configurations evident in April are sustained, then absent policy interventions, headline inflation is projected in the range of 2.0-3.5% in the first half of the year and 3.5-4.5% in the second half,” it added.

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