Story Of The Week

Retail Inflation on a record low

Retail Price Inflation of India reduced to a record low of 2.99% in April, from a five month high of 3.89% in March on a lower base effect and lower food prices.
Under a new series with a 2011-12 base year, Updated wholesale price index (WPI)-based inflation also dropped to 3.85% in April from 5.29% in March.

What is Retail Price Inflation?

Retail Price Inflation or RPI is an inflation measure which measures the change in the cost of a representative sample of retail goods and services.
It is an official measure of the general level of inflation as reflected in the retail price of a basket of goods and services such as energy, food, gasoline (petrol), housing, household goods, traveling fare, etc. A consumer price index (CPI) is one form of RPI.

Reasons for low RPI:

Inflation likely cooled in April because of lower food prices. However, according to a reuters poll, this may not give the Reserve Bank of India enough amount of scope to ease monetary policy anytime soon.
Consumer price inflation is expected to have remained below the RBI’s medium-term target of 4.0 percent for the sixth successive month due to lower base effects and a fall in the cost of pulses, cereals and perishable goods.
As per a government statement, an influencing factor was a deflation of 13.64% in the prices of pulses. A new food index is also being compiled combining the food articles under primary articles and food products under manufactured products. Along with the Consumer Food Price Index released by the Central Statistics Office, this would also help to monitor the price situation of food items in a better way.
Pulses and products recorded a decline in prices in April, with a deflation of 15.94 per cent, where as vegetable prices reduced by 8.59 per cent. The figures for March were (-)12.42 per centfor Pulses and (-)7.24 per cent for vegetables.

Asperdata

As per the data released by the ministry of statistics and programme implementation (MOSPI), inflation in the fuel and light category for April was 6.13 per cent, slightly higher than 5.56 per cent in March. Price of fruits grew at 3.78 per cent in April, much slower than 9.35 per cent in March.
For cereals and products, the rate of increase of price in April was at 5.06 per cent, which was lower than 5.38 per cent in the previous month. For meat and fish, the inflation print is 1.90 per cent in April, from 2.96 per cent in March.
Overall food inflation, or the rate of price increase, for April was at 0.61 per cent as against 1.93 per cent in March.

Steps that could be taken by RBI:

According to NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy, “RBI is not likely to cut interest rates at least for six months as inflationary pressures are building up,”
As per the Economists , the Reserve Bank of India (RBI) would not cut the repo rate and would likely wait for more data on monsoon, the impact of the goods and services tax (GST) and the yet-to-be-implemented Pay Commission’s report on allowances on prices. In the words of Indranil Pan, chief economist, IDFC Bank ,“We continue to believe that the RBI would not change its repo rate at least till the unknowns of monsoon, GST and allowances from the Pay Commission are fully factored into the headline CPI numbers”.
In the policy review held on April 7, RBI panel had left the repo rate, or the benchmark lending rate, unchanged at 6.25 per cent for the third time in a row, citing upside risk to inflation. The next policy is however scheduled on June 7.

CHANGE IN BASE YEAR

India changed the base year for gross domestic product (GDP) and Consumer Price Index based inflation data about two years ago in 2015 whereas the old base year was no revised for other macro indicators.

Because of this delay in revising the base , the markets and policy makers are often confused as they struggle to analyse the discrepancies between the volume growth record by the IIP and value-added numbers reflected in GDP.

However, as per Mr. NR Bhanumurthy, the reset of the base year is expected to bring in more accuracy in measuring the level of economic activity as well the national income

As per Mr.G.C. Manna, former head of the Central Statistics Organisation, the new IIP series will cover a new basket of commodities and assign new weights to them, removing obsolete items like typewriters and floppy disks,
But the IIP series for first 11-months of 2016/17 showed a major variance, with a contraction of 0.3 per cent in manufacturing output as compared to 7.7 per cent growth noted in the gross value added data of GDP for the whole year.

Future:

Inflation in the next few months is dependant heavily upon the monsoon. As per the forecast by the India Meteorological Department, it is likely that India will receive higher monsoon rainfall this year than previously predicted, as concerns have eased over El Nino, a weather phenomenon associated with drought-like conditions. A poor monsoon might lead to increase in food prices and this may force the central bank to raise interest rates for the first time in more than three years.
Even the third advance estimates of the food grain production 2016-17, released by the ministry of agriculture on recently, signalled a harvest of 273.38 million tonnes, beating a previous forecast of 271.98 million.
The record harvest might lead to crop stocks that will eventually result in lower food inflation in the coming months.
Economists believe that these conditions will ease food prices in the coming months.

Stance of government:

The current thought process within Modi-government is more towards growth than inflation concerns, which was evident from the CEA speech. As growth worries takes the centre stage, Monetory Policy Committee will come under bigger pressure to take a relook at its rate stance. The April CPI number will serve a strong reminder for the same.

References:

http://timesofindia.indiatimes.com/business/india-business/retail-inflation-hits-a-low-of-2-99-in-april/articleshow/58646117.cms

http://www.livemint.com/Politics/HlHP0Ws3Sp21UArh8hiWQO/Retail-inflation-in-April-drops-to-new-record-low-of-299.html

http://www.business-standard.com/article/economy-policy/retail-inflation-falls-to-record-low-in-new-series-117051300082_1.html

http://economictimes.indiatimes.com/news/economy/indicators/april-retail-inflation-seen-easing-to-three-month-low/articleshow/58639172.cms

http://www.moneycontrol.com/news/business/economy/preview-indian-retail-inflation-seen-easing-in-april-on-lower-food-prices-2276573.html

http://www.firstpost.com/business/forget-new-iip-wpi-series-a-record-low-retail-inflation-is-a-shocker-to-mpcs-rate-stance-3440930.html

http://in.reuters.com/article/india-economy-inflation-idINKBN187108

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