Retail inflation rises to 3-month high of 8.59%

Industrial production contracted for second month in a row to 0.5 % in March

Retail price inflation rose for a  consecutive month in April to 8.59 per cent, diminishing hopes of a rate cut by the Reserve Bank of India (RBI) in its June 3 review of credit policy. A sharp rise in the prices of vegetables and fruits by 17.5 per cent and 21.73 per cent, respectively, put the consumer price index (CPI) at a three-month high.

Along with high inflation, fears of a sub-normal monsoon might prevent RBI from taking a benign look at interest rates. The central bank has set a target of eight per cent CPI by January 2015. In the previous review on April 1, the regulator had kept the key policy rate unchanged. However, with inflation rising, RBI might be forced to hold the rates in its first review after formation of the new government.

“With food inflation inching up to 9.8 per cent in April (against 9.1 per cent in March), the forecast of a sub-par monsoon has clouded the outlook for the CPI. The monetary stance is expected to remain cautious in the coming policy review, with a high likelihood of a status quo with respect to the policy rate.” said Aditi Nayar, senior economist at Icra.

In 2013-14, after touching a high of 11.16 per cent in November, retail inflation had started moderating and stood at 8.03 per cent in February. In March, however, it shot up again to 8.31 per cent, owing to increase in prices of fruits and vegetables.

In April, milk and products (11.42 per cent), cereals and products (9.67 per cent), egg, fish and meat (9.41 per cent), and condiments and spices (9.33 per cent) are the other items that contributed significantly to high inflation. The rise in prices was higher in rural areas at 9.25 per cent than 7.69 per cent in urban areas.

Although RBI now takes CPI as the barometer for deciding the monetary policy stance, the wholesale price index (WPI) can be an important indicator of consumer prices in some cases.

The data for WPI-based inflation will be released later this week. It rose to a three-month high of 5.7 per cent in March from a nine-month low of 4.68 per cent in February due to supply-side constraints, primarily prices of food such as in those of potato and onion.