Rainfall deficit in the key sowing month of July 2014, it would increase the likelihood of CPI inflation overshooting the target-ICRA Research

Notwithstanding the decline in under-recoveries on the retail sale of diesel (to Rs. 5.93/litre for the ongoing fortnight from Rs. 10.48/litre for December 16-31, 2013), the expectation that monthly revisions in the selling price would continue suggest persisting upward pressure on the CPI trajectory as suppressed inflation is released.

The substantial contribution of wages in core-CPI is expected to keep inflation levels sticky in the near term. Moreover, the pricing power for various service providers remains relatively high given the inherent rigidity in enhancing supply, particularly for services such as medical care and education, and the non-tradable nature of various services.

Similar to the trend in the WPI, food inflation exceeded overall CPI inflation in 2013-14, with sporadic supply disruptions for perishables and entrenched supply-demand mismatches for protein items negating the impact of plentiful monsoon rainfall. If there is a considerable rainfall deficit in the key sowing month of July 2014, it would increase the likelihood of CPI inflation overshooting the target of 8.0% for January 2015, as articulated by the RBI's glide path. This would likely result in a delay in monetary easing until at least early-2015.

Powered by Capital Market - Live News