The Curious Case Of Indian Inflation
BMI View: Despite sluggish economic activity and tighter monetary conditions, headline inflation remains a key concern in India. Acute food price pressures lie at the heart of the problem, which we believe is, to a large extent, a function of expansionary government policy. Absent a major reduction in subsidies and minimum support prices for agricultural goods, both of which are unlikely with general elections nearing, there is a risk that the Reserve Bank of India (RBI) may be forced to keep interest rates tight for longer in 2014, which would in turn stifle economic recovery prospects in the coming 12 months.
In most cases, sluggish economic activity, tighter monetary policy and a multi-year credit cycle downturn would be sufficient to place a lid on headline inflationary pressures. This is far from the case in India, however. On the one hand, the domestic economy continues to stumble, with real GDP still growing at a rather lacklustre sub-5% clip. What's more, the Reserve Bank of India (RBI) remains very much in tightening mode, having hiked the benchmark interest rate by 50 basis points (bps) since August to 7.75%. On the other hand, headline inflation continues to pose a huge headache for policymakers. India's wholesale price index (WPI), the benchmark inflation rate, climbed to an eight-month high of 7.0% year-on -year (y-o-y) in October. At a retail level, the problem is more acute, with the country's consumer price index (CPI) increasing by 10.1% y-o-y in October, the first double-digit rate on record since March.
The breakdown of WPI provides some insight into India's curious inflation problem. It would be inaccurate to suggest that the disinflationary macroeconomic forces outlined above have not had an impact. Manufactured WPI, which is regarded as a proxy for core inflation, has actually been quite well behaved, rising by just 2.5% y-o-y in October (and a monthly average of 2.8% y-o-y since the start of FY2013/14 [April-March]). Instead, the main driver of headline inflation has been surging food prices. Food WPI increased by 14.7% y-o-y in October, the fastest pace in 30 months. Food CPI, meanwhile, came in at a similarly acute 12.3% y-o-y. Many of the key staples of the Indian consumer are experiencing runaway inflation, such as onions (up 278.2% y-o-y), tomatoes (121.9%), and ginger (108.8%).
|Food The Main Driver|
|India - Components Of Wholesale Price Index, % chg y-o-y|