Inflation to moderate in 2014-15
Jul 10 2014 , Mumbai
There are risks to inflationary outlook from poor monsoon and Iraq oil crisis
“The Reserve Bank of India has targeted bringing down consumer price inflation inflation to around 8 per cent by January 2015 and 6 per cent by January 2016. As regards the wholesale price index, though headline inflation has inched up to 6 per cent in May 2014 led by an increase in prices of some food articles and global commodity prices crude oil, oilseeds, it is expected to moderate by the end of 2014,” said the economic survey 2013-14 tabled in Parliament by finance minister Arun Jaitley.
As inflation eases, it is expected that the RBI would adopt a more accommodative stance and undertake monetary easing. However, the most prominent risk to this outlook is the possibility of sub-normal monsoon during 2014-15 and impact on crude oil prices on account of the Iraq crisis. The meteorological department has predicted below-normal rainfall with a 70 per cent probability of an El Nino occurring,” the survey added.
Pointed out Anubhuti Sahay, senior economist, Standard Chartered Bank, “We do expect CPI inflation to come off during June-November 2014 due to favourable base effect before it inches up to 8 per cent in the first quarter of 2015. However, recent monsoon developments pose an upside risk to our forecasted inflation trajectory.”
The survey said that the government has to work towards a low and stable inflation rate through fiscal consolidation, moving towards establishing a monetary policy framework, and creating a conducive environment for a competitive national market for food.
A Prasanna, economist, ICICI Securities primary dealership said, “It's reassuring to know that the finance ministry and Reserve Bank are on the same page when it comes to inflation. They are speaking in one voice about the need for inflation (CPI) targeting as a key to promoting growth of the economy,"
DK Joshi, chief economist, Crisil said, “We also expect 8 per cent inflation in 2014-15 but the risks are high crude prices and sub-normal monsoon.”
Inflation in India began rising after 2005-06 with rapid credit growth arising from difficulties in sterilising foreign exchange intervention. Though policy interest rates were raised, liquidity continued to rise, and consequently the overall stance of monetary policy remained easy.
The survey said inflation showed signs of receding with average wholesale price index (WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14 compared to 7 and 9 per cent over the previous two years. Consumer price inflation, though higher than the WPI, has also exhibited signs of moderation with CPI (new-series) inflation declining from 10.21 per cent during 2013-14 to about 9.49 per cent in 2013-14, the survey said. Food inflation, however, remained stubbornly high during 2013-14, reaching a peak of 11.95 per cent in third quarter.
Highlighting reasons, the survey said high inflation, particularly food inflation, was the result of structural as well as seasonal factors. Contribution of the commodity sub-groups, fruits and vegetables, as well as egg, meat and fish to the food inflation has been very high, it said.
However, inflation in non-food manufactured product (WPI core) has remained benign throughout the year, with average inflation moderated to four year low of 2.9 per cent in 2013-14, which indicates that underlying pressures of broad-based inflation have somewhat eased, it said.
The survey noted that the course of gradual monetary easing that had started alongside some moderation of inflationary pressures at the beginning of the financial year 2013-14 was disrupted in May 2013, following indications of possible tapering of the US Fed's quantitative easing.