Why high retail inflation is bad news for India Inc

RBI may not reduce interest rates in its August policy review as poor monsoon drives food prices up.

 |  3-minute read |   14-07-2015
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Corporate India which was hoping for a further reduction of interest rates by the central bank may end up being disappointed, thanks to inflation numbers released on Monday. Retail inflation, based on the change in costs of retail goods and services, rose to 5.4 per cent in June, against 5.13 per cent in May. This might prevent Reserve Bank of India (RBI) governor Raghuram Rajan from effecting a further cut in lending rates in August, after bringing down the repo rate, or the rate at which the central bank lends to commercial banks, by 0.25 per cent to 7.25 per cent in June, which was the third cut this year.

Even while he announced the rate cut last month, Rajan left the window open for more rate cuts but had cautioned of inflation touching 6 per cent in January, 2016. There were fears of a monsoon deficit even then, but those have now been confirmed. After a good spell in June, the monsoon slowed down in July, leaving a national shortfall of 3 per cent till Monday. The Met department has further predicted that the monsoon will tend to get weaker after July 15.

Meanwhile, consumer price inflation (food inflation), calculated on the basis of the average price of goods and services, rose to 5.48 per cent in June as against 4.8 per cent in May and 5.1 per cent in April. This was led by a sharp increase in inflation in protein-rich commodities, and oils and fats. The overall protein-led inflation rose to 9.7 per cent from 8.2 per cent, but was higher in meat, fish, eggs and pulses, while inflation in milk eased. Inflation in pulses rose for the sixth consecutive month and was at its highest rate of 22.2 per cent in June, and the primary reason for this has been weak rains, according to Crisil Research. However, the wholesale inflation numbers, based on the price of a representative basket of wholesale goods, continued to be in the negative zone in June, at (-)2.4 per cent, but that may not offer any respite since the RBI is known to consider consumer price inflation for its monetary decision.

If this was not bad news enough, the recent Index of Industrial Production (IIP) numbers point to a clear slowdown in rural demand, again owing to a poor monsoon, which has hit manufacturers of consumer goods. IIP inched down to 2.7 per cent in May from 3.4 in April. This is despite the better performance of the core sector, which comprises coal, electricity, crude oil, natural gas, steel, cement, fertilisers, and refinery products which turned positive and jumped to 4.4 per cent, from (-)0.4 per cent in April. Consumer goods companies that were betting on rural demand to shore up sales will now be a disappointed lot.

However, there is reason to cheer. For one, the sowing of the kharif crop is gathering pace. The total sown area for kharif crops as on July stood at 445.11 lakh hectares compared with 275.10 lakh hectares at this time last year. There has been an increase for oilseeds and pulses too. These factors should stabilise inflation, provided the monsoon does not play spoilsport.

Writer

MG Arun MG Arun @mgarun1

The writer is Deputy Editor, India Today.

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