A customer pays for vegetables at a stall in Varanasi, Uttar Pradesh, India (Photographer: Dhiraj Singh/Bloomberg)  

India’s Retail Inflation Eases Further In March As Food Prices Fall 

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Retail inflation moderated in March as vegetable prices eased further on fresh supplies. However core inflation, that strips out the impact of food and fuel prices, continued to rise hitting a 43-month high.

The index of consumer price inflation in India stood at 4.28 percent in March, slowing for the third straight month from a 17-month high, according to data released by the Central Statistics Office. Economists polled by Bloomberg had forecast retail inflation at 4.1 percent. It stood at 4.4 percent in February and 5.07 percent in January.

“The dip in inflation for food and beverages  in March 2018 was primarily led by vegetables, egg and milk,” Aditi Nayar, principal economist at ratings agency ICRA, said in an emailed note. “A continued easing in prices of pulses, sugar and some vegetables would dampen the impact of the seasonal uptick in prices of various perishable items in the ongoing month.”

The Usual Suspects

The seasonal surge in the price of onions and tomatoes had pushed up retail inflation from its all-time low in June. A fresh supply of tomatoes starting December-end and onions starting March-end was expected to pull prices lower.

India’s monetary policy committee, in its bi-monthly meeting last week, noted that a sharp moderation in food prices over the last two months will keep inflation lower than expected for April-September. “Overall food inflation should remain under check on the assumption of a normal monsoon and effective supply management by the Government,” the MPC had said.

The committee, however, cited upward risks to inflation. Among the factors which could push inflation higher are strengthening aggregate demand, risks from a fiscal slippage, the volatility in global oil prices and a revised formula for the minimum support price of Kharif crops that was announced in the Union Budget, the MPC said. The Reserve Bank of India expects inflation to firm up to 5.1 percent in April-June, before moderating again.

Also Read: Monetary Policy: MPC Begins New Financial Year With A Status Quo On Rates

The headline CPI would've fallen further if not for housing inflation which has stayed over 8 percent for the last four months. The MPC had also noted that the staggered impact of housing rent allowance revisions by state government could push inflation up. Excluding the impact of HRA revisions, inflation is expected between 4.4-4.7 percent in the first half of 2018-19.

Core CPI Keeps Growing

The inflation rate, excluding food and oil prices, stayed above the 5.2 percent mark for the fourth straight month. Core CPI inflation rose to 5.37 percent in March driven primarily by education and other services. That’s added 10 basis points to overall inflation, according to State Bank of India’s Chief Economic Adviser Soumya Kanti Ghosh.

Increasing tuition fees in March could explain the increase in education inflation. After a long time, core has been the primary mover of inflation trajectory.
Soumya Kanti Ghosh, Chief Economic Adviser, SBI

The Oil Impact

Besides, crude oil prices have gone up to $67 a barrel this year from nearly $46 a barrel in June last year, when inflation was at a record low.

According to Ghosh, rising oil prices, which have kept bond investors on the edge, are not a big worry any more. “There is a palpable fear in the market that an uninterrupted increase in oil prices could have an adverse impact on inflation, fiscal deficit and current account deficit. We however believe such a fear is unwarranted, specifically inflation,” he wrote in the SBI Ecowrap.

  • Every time oil prices increase by $10 a barrel, CPI follows with a 10 basis point rise
  • Every time the government cuts excise duty by Rs 1 for every $10 per barrel increase, fiscal deficit widens by 6 basis points

Inflation Internals

  • Food price inflation stood at 2.8 percent compared to 3.26 percent in February.
  • Prices of pulses and product fell 13.4 percent year-on-year in March. Prices have softened for the sixteenth straight month.
  • Fuel and light inflation stood at 5.7 percent in March compared to 6.8 percent in February.
  • Housing inflation stood at 8.3 percent compared to 8.28 percent in February.
  • Clothing and footwear inflation was at 4.9 percent compared to 5 percent in February.
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