India inflation woes may continue

Oil has touched a 3-month low and optimists have already passed the verdict that inflation has peaked. Credit rating agency Moody's on Monday said inflation may have peaked in India as is reflected by the latest moderation, even though global investment banker Goldman Sachs raised projection for the rate of price rise by 1.5 per cent to 11.5 per cent for the current fiscal.

Inflation remains at a 13-year high of 11.98 per cent for the week ended July 19. Falling crude prices and slowing down of commodity boom cycle, recovery of US dollar are the other reasons which support the optimists.Global inflationary pressure could undoubtedly subside but the domestic situation may continue to remain bleak. This was reflected in the hawkish stance of the RBI(Reserve Bank of India) at the recent monetary policy review where it raised Repo Rate by 50bps and CRR by 25bps to 9% each.Some might criticise it as a regressive step but the fact remains that inflation fears remain intact.

The inflation numbers can be expected to remain high owing to the what is called the ‘base effect’. Last year the prices had begun to moderate at this point of time. However this time they continue to remain firm .So year-on-year percentage rise in prices will be higher resulting into scary inflation numbers.

Monsoon has been erratic this year. Rainfall has been below average in key areas of Gujarat,Andhra Pradesh and Maharashtra.As a result the cash crops like groundnut could take a severe blow.Groundnut and cotton prices are expected to remain firm.Edible oil prices are already high and poor harvest may not help either.

Steel prices ,a major component of WPI (Wholesale Price Index)calculation in India ,had been kept artificially low.Steel producers had imposed a voluntary three month moratorium on prices on behest of the government.This three month deadline expires in first week of August.As global steel prices remain high domestic hike in steel prices will prevent inflation from heading south.

Globally crude prices are hovering around their 12-week low. Indeed this is good news but fuel prices were already kept low in India. So even if crude oil bubble continues to deflate domestic prices will remain intact.Moreover expecting crude oil prices to slip into double digits and hoping for a subsequent decline in fuel prices at home will be too optimistic. One more bad news from the financial markets or a fresh war of words between Israeli and Iranian governments could see the ‘black gold’ paring with the recent losses.Recent figures reveal that the demand for oil in developed world has been moderating. This is an encouraging development and will undoubtedly benefit the inflation-hit emerging economies.

Market is expecting no further cut in interest rates by US Federal Reserve in August.Even a slight hike by 25bps is a possibility, though a distant one.If this happens then crude oil will lose its appeal as hedge against the weakening dollar and a further decline in prices could be seen.
So one should not read too much into this recent stabilization in inflation.This euphoria may turn out to be a short-lived.Till then pray for a divine intervention in the form a good monsoon. It’s a shame on our policymakers that Indian agriculture is yet to witness a Promethean growth. The entire nation’s economic and monetary policy is held ransom to the performance of south-west monsoon. Everyone in this emerging economic superpower, from the ordinary farmer to the RBI Governor, looks up to the skies for relief!