Stubborn prices show no sign of cooling

With a 10% rise in prices of petro products, inflation could go beyond 7.5%

A rise in prices of petroleum products was a given after the state polls. But for reasons best known to the oil marketing companies and the government, prices were not raised even as crude prices have jumped 14 per cent since the beginning of February. Economists say it’s only a matter of time before it happens, and if it does, it will have a cascading effect on inflation. Deutsche Bank says a 10 per cent increase (which it expects) in diesel, LPG and kerosene prices will push inflation to around 7.5 per cent.

The conflicting set of macroeconomic data is only going to make the Reserve Bank of India’s (RBI) job tougher. While industrial output data shows a slowdown in the investment cycle and industrial activity, headline inflation for February has risen to seven per cent year-on-year (Y-o-Y), mainly driven by higher food prices. Though core inflation is down to 5.5 per cent Y-o-Y from 6.5 per cent in January, economists believe prices are not showing a meaningful downward trend, which is essential for the central bank to begin its rate cut cycle.

A sharp rise in food prices has negated the deceleration in core inflation too. Taimur Baig and Kaushik Das of Deutsche Bank believe this is a cause of worry as February is traditionally a benign month for food prices. Also, food prices have been the source of lower inflation in the last few months. Given that this year has seen a bumper crop production, food prices should not have risen so fast. This brings the focus on the gap between demand and supply.

All indications suggest inflation inching higher. “Energy inflation will tick up in response to more expensive crude oil imports and fuel price rises will most likely be rolled out for the government to control a ballooning subsidy burden,” says Leif Eskesen, chief economist India and Asean, HSBC Global Research. Another factor that could put pressure on core inflation in coming months is the rising cost of power. According to Mole Hau of BNP Paribas, resurging food price inflation, stickier core price pressures, rises in domestic electricity prices and excise duty on diesel means headline inflation looks sticky at seven per cent. Therefore, the scope for aggressive rate cuts by RBI looks increasingly unlikely. Deutsche Bank is doubtful of a rate cut even in the April policy meeting.