WPI inflation at 5.7%: With food prices remaining the villain, monsoon holds the key
The Monetary Policy Committee (MPC) had cautioned in its recent policy readings that monsoons this year will be crucial to decide the course of policy rates, while changing its policy stance from ‘accommodative’ to ‘neutral’ early this year.
The highlight of the wholesale price index (WPI) inflation data for the month of March is the hardening food prices. While the WPI has declined marginally to 5.70 percent in March due to easing fuel prices and manufactured goods, the food prices have picked up, continuing a trend shown in the consumer price inflation data. During the month, food prices saw a steep rise of 3.12 percent in March compared to 2.69 percent in the previous month, primarily because of a steep price jump in vegetable prices. In this segment, inflation jumped to 5.70 percent. Fruits, egg, meat and fish, too registered a jump.
In the CPI too, there was evidence of food and vegetable prices hardening since January. The CPI food inflation increased to close to 2 percent in February-March from 0.61 percent while vegetable prices too have been inching up. A note from rating agency, Care, said food prices are likely to moderate in the coming months, with the rabi harvest coming into the markers. But, the agency cautions on the impact of a below normal monsoon saying a clearer picture will emerge only by July-August. “We believe that there is an upside risk to the inflation with the increasing global commodity prices and expectation of possible below-normal monsoons. A clearer picture will emerge in July-August,” Care said.
Even the Monetary Policy Committee (MPC) had cautioned in its recent policy readings that monsoons this year will be crucial to decide the course of policy rates, while changing its policy stance from ‘accommodative’ to ‘neutral’ early this year. From this point, this is one factor one needs to watch out for -- the imminent forecast of meteorological department on 2017 monsoon.
Private forecasters have already given a gloomy monsoon picture. Skymet Weather has forecast that monsoon 2017 is likely to remain below normal at 95 percent (with an error margin of +/-5 percent) of the long period average (LPA) of 887 mm for the four-month period from June to September, sending panic signals to farmers as kharif crop relies heavily on the performance of the southwest monsoons. The RBI, for 2017-18, has projected retail inflation to average at 4.5 percent in the first half and 5 percent in the second half.
Even for growth prospects of the economy, a good monsoon remains key. There is no significant pick up in the ground-level economic activity so far if manufacturing figures offer any clue. In a note, HDFC Bank had cited the upside risks to the economy. “…the private investment cycle continues to be weak alongside subdued credit growth in the economy. Thus, the overall growth momentum is unlikely to be robust and broad-based unless the capex related bottlenecks are resolved (NPAs, monetary transmission etc.),” said the HDFC Bank note.
A good monsoon is even more critical in the backdrop of the persisting impact of demonetisation on the economy. The note ban impacted almost all segments of the economy since cash contributed 70-80 percent of the total transactions. The sudden withdrawal of high value notes took everyone by surprise and even the big companies faced the heat as demand took a hit. It isn’t hard to explain why the manufacturing sector growth suffered on account of demonetisation. An even more worrying trend is the fall in capital goods, which is essentially an indicator of the investment activity on the ground. This segment has contracted 3.4 percent in February as against a growth of almost 11 percent in January.
A failed monsoon will only add to the worries.
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