WPI inflation has stayed around 7.5 per cent during 2012-13 so far. This reflects a combination
of factors: the spillover impact from fiscal imbalances, some pass-through from earlier exchange
rate depreciation and feeble supply response. Persistence in the non-food manufactured products
inflation, even as growth has slowed, has emerged as a concern. While the late revival of monsoon
has helped cool the price pressure from commodities like vegetables, the projected shortfall in
the kharif crop is likely to exert pressure on food prices, especially cereals, pulses and oilseeds.
Though the administered price revisions effected in September 2012 will raise inflation in the
near-term, they will also help in reducing the medium-term inflationary pressures by containing
the fiscal deficit. The pressures on fuel inflation could soften if crude prices remain range-bound
and rupee maintains a strengthening bias. Overall, the inflation path is expected to remain sticky
in the near-term, barring major supply shocks.
As global inflation conditions ease, India
remains an outlier
VI.1 Tepid growth, high unemployment and
negative output gap along with weak demand
have eased the inflation environment in the
Advanced Economies (AEs). The average
inflation for OECD countries declined to 2.0
per cent in August 2012 from 2.8 per cent in
January 2012. India remains an outlier, with
higher inflation than most Emerging and
Developing Economies (EDEs), which reflects
the role of structural as well as country-specific
factors.
Further quantitative easing by AE central
banks adds to global liquidity
VI.2 The monetary policy stance in most AEs
remains accommodative of growth recovery
(Table VI.1). The recent round of monetary
easing by some central banks of AEs, notably
the European Central Bank (ECB), US Federal
Reserve (US Fed) and the Bank of Japan (BoJ)
during September 2012 temporarily reduced
financial market stress and contributed to asset
price build-up, particularly in equity markets as
sentiments improved (for details see Chapter
V). The exceptionally easy monetary policy of
the US Fed and the BoJ is expected to weaken
the dollar and yen and trigger gains in EDE
currencies. This could feed into lower inflation
in EDEs through exchange rate pass-through effects. However, the liquidity glut in AEs could
get transmitted to EDEs given the interest rate
differential, which may push up demand and
lead to higher commodity prices.
VI.3 Given the spare capacity in the US and
the global economy, subdued wage pressures
and limited impact of commodity prices on core
inflation in AEs, pressures on inflation in the
near-term may remain low. However, the
medium-term impact of easing of liquidity on
inflation and inflationary expectations cannot
be overlooked. The impact of quantitative
easing on commodity prices through the
financialisation of commodity markets is also
likely to be a source of risk to inflation.
Global commodity prices remain volatile
with uncertain outlook
VI.4 International commodity prices increased
markedly in Q2 of 2012-13, reverting from the
moderation observed during Q1 (Chart VI.1a).
The uptick in commodity prices in recent
months has been driven by crude oil and food
prices. However, metal prices have continued
to decelerate since February 2012, except for
the recent period, due to weak demand conditions
in both AEs as well as EDEs. Taking into
account the relatively subdued demand, given
the growth slowdown and possible increases in
oil production in OPEC countries, Brazil,
Kazakhstan, and the Russian Federation and the impact of shale gas on energy supplies in the
US, crude oil prices are expected to remain
range-bound. However, the near-term path of
energy prices could be conditioned by the
Middle East geopolitics.
Table VI.1: Global Inflation Indicators |
Country/ Region |
Key Policy Rate |
Policy Rate
(as on October 25, 2012) |
Changes in Policy Rates (basis points) |
CPI Inflation
(y-o-y, Per cent) |
Sep, 2009 to Dec. 2011 |
Jan 2012 to Oct 2012 (as on 25th Oct.) |
Sep-11 |
Sep-12 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Advanced Economies |
|
|
|
|
|
Australia |
Cash Rate |
3.25 (Oct. 3, 2012) |
125 |
(-) 100 |
3.4# |
2.0# |
Canada |
Overnight Rate |
1.00 (Sep. 8, 2010) |
75 |
0 |
3.2 |
1.2 |
Euro area |
Interest Rate on Main Refinancing Operations |
0.75 (Jul. 11, 2012) |
0 |
(-) 25 |
3.0 |
2.6 |
Israel |
Key Rate |
2.25 (Jul. 1, 2012) |
225 |
(-) 50 |
2.9 |
2.1 |
Japan |
Uncollateralised Overnight Call Rate |
0.0 to 0.10* (Oct. 5, 2010) |
(-) 10 |
0 |
0.2$ |
-0.4$ |
Korea |
Base Rate |
2.75 (Oct. 11, 2012) |
125 |
(-) 50 |
3.8 |
2.0 |
UK |
Official Bank Rate |
0.50 (Mar. 5, 2009) |
0 |
0 |
5.2 |
2.2 |
US |
Federal Funds Rate |
0.0 to 0.25* (Dec. 16, 2008) |
0 |
0 |
3.9 |
2.0 |
Emerging and Developing Economies |
|
|
|
|
|
Brazil |
Selic Rate |
7.25 (Oct. 11, 2012) |
225 |
(-) 375 |
7.3 |
5.3 |
China |
Benchmark 1-year Deposit Rate |
3.00 (Jul. 6, 2012) |
125 |
(-) 50 |
6.1 |
1.9 |
|
Benchmark 1-year |
6.00 (Jul. 6, 2012) |
125 (600) |
(-) 56 (-) 150 |
|
|
|
Lending Rate |
|
|
|
|
|
India |
Repo Rate |
8.00 (Apr. 17, 2012) |
375 (100) |
(-) 50 (-150) |
9.0$ |
10.3$ |
Indonesia |
BI Rate |
5.75 (Feb. 9, 2012) |
(-) 50 |
(-) 25 |
4.6 |
4.3 |
Philippines |
Reverse Repurchase Rate |
3.75 (Jul. 26, 2012) |
50 |
(-) 75 |
4.7 |
3.6 |
|
Repurchase Rate |
5.75 (Jul. 26, 2012) |
50 |
(-) 75 |
|
|
Russia |
Refinancing Rate |
8.25 (Sep. 14, 2012) |
(-) 275 |
25 |
7.2 |
6.6 |
South Africa |
Repo Rate |
5.00 (Jul. 20, 2012) |
(-) 150 |
(-) 50 |
5.7 |
5.5 |
Thailand |
1-day Repurchase Rate |
2.75 (Oct. 17, 2012) |
200 |
(-) 50 |
4.0 |
3.4 |
*: Change is worked out from the minimum point of target range. #: Q3 (Jul-Sep). $: August.
Note: Figures in parentheses in Column (3) indicate the effective dates when the policy rates were last revised. Figures in
parentheses
in Columns (4), and (5) indicate the variation in the cash reserve ratio during the period. For India, data on inflation
pertain to
CPI for industrial workers (CPI-IW).
Source: Websites of respective central banks/statistical agencies. |
VI.5 Food prices, especially of wheat and
coarse cereals, increased in recent months
following supply disruptions in a number of
countries (Chart VI.1b). The Food and
Agriculture Organisation (FAO) estimates that
world cereal production in 2012 will be 2.6 per
cent down from the previous year’s record crop,
but suggests that fears of serious global supply
shortages are now behind us. Notwithstanding
the early indications of improved crop conditions
in 2013, the near-term price pressures on global food continue to remain significant and could
turn out to be a source of inflation especially for
countries that are net importers.
Inflation pressures persist in India despite
weakening of growth momentum
VI.6 Headline WPI inflation (y-o-y) has
remained sticky at around 7.5 per cent throughout
the current financial year (7.8 per cent,
provisional in September 2012). The build-up
in price pressures continues to remain persistent
as seen from the secular upward trend in the
index (Chart VI.2). The momentum of price
changes, as indicated by the 3-month moving
average seasonally adjusted month-over-month
changes in WPI, also indicates some uptick in
the recent months (Chart VI.2d).
VI.7 In the recent period, changes in
administered prices have been a major driver of
inflation (Chart VI.3). Revisions in coal prices
in January 2012 and electricity prices in June
2012 led to higher inflation. The revision in
diesel and LPG prices would add to inflation
during the course of the year though it will help
moderate inflationary pressures in the mediumterm,
by way of fiscal consolidation
Food inflation remains elevated reflecting
poor supply elasticities
VI.8 Food inflation concerns persist. Although
there has been some moderation in the inflation
in fruits and vegetables in recent months following the late revival of the monsoon, a
number of items within the primary food articles
group witnessed significant price pressures
(Chart VI.4a). Inflation in cereals has reached
double digits after more than two years, while
pulses inflation has remained above 20 per cent
since June 2012. Apart from the trends in
primary food articles, there has been significant
pressure on some manufactured food products
like sugar and edible oils (Chart VI.4b). The
deficiency of the monsoon during June and July
2012 impacted the crop prospects of key food
products, which has translated into an increase
in prices (Chart VI.5).
|
|
VI.9 Since 2008-09 the average food inflation
at 10.3 per cent has been much above the overall
headline inflation of 7.6 per cent. Both supply
and demand side factors could have played a
role in keeping food inflation high. Significant
increases in rural wages in recent years have
contributed substantially to the increase in cost
of production as productivity growth remains
low. This has also led to a significant increase
in the Minimum Support Prices for most crops.
At the same time, increases in wages, both in
rural and urban areas, could have pushed up
demand for food, given that the share of food
in total consumption basket is higher for wage
earners than for other segments of the population.
VI.10 The recently released key results of the
NSSO 68th round survey (2011-12) on household
consumption expenditure indicate that real per capita consumption expenditure in rural and
urban areas grew at an average rate of 8.7 per
cent and 6.7 per cent per annum, respectively,
during the period 2009-10 to 2011-12, compared
with a growth of 1.4 per cent and 2.4 per cent
per annum, respectively, during 2004-05 to
2009-10. Although these results could have been
influenced by the fact that 2009-10 was a
drought year, which could have led to
underestimation of consumption, thereby giving
a low base, the fact that real consumption
expenditure expanded during a period of high
food inflation indicates that the demand remains
strong, feeding into higher price levels as supply
elasticities remain low.
Fuel inflation reflects lagged pass-through;
under-recoveries remain high
VI.11 Inflation in the fuel and power group
remained in double digits since February 2010,
except for July and August 2012. The uptick in
fuel inflation to double digits in September 2012
was driven by revision in price of diesel and
increase in prices of a number of freely priced
fuel products. Electricity price increase since
June 2012 also contributed to the pick-up in
inflation in this segment.
VI.12 Freely priced product prices moved in
line with the changes in international prices,
while administered fuel prices were not changed
during June 2011- August 2012 (Chart VI.6).
This has led to substantial build-up of underrecoveries
to the tune of `856 billion during April-September 2012, with about 62 per cent
of the under-recoveries coming from diesel.
VI.13 Against this background, in September
2012 the government revised diesel prices by
`5 per litre (excluding VAT) and capped the
supply of subsidised LPG cylinders (of 14.2 kg)
to each consumer to six cylinders per annum.
Although the revision could put upward
pressures on fuel inflation in the coming months,
it will help in price stability over the medium
term through fiscal consolidation.
VI.14 However, even after the recent revision
in oil prices, pass-through, which remains
incomplete, has impacted the subsidies and the
fiscal deficit (for details, see Chapter II).
Currently (effective October 16, 2012), the
estimated under-recovery by domestic oil
marketing companies (OMCs) is `9.8 per litre for diesel, `33.9 per litre for PDS kerosene and
`468.5 per cylinder for subsidised domestic
LPG.
VI.15 Trends in global prices and exchange
rates significantly impact domestic fuel prices,
as more than 85 per cent of India’s oil
consumption is met through imports. Global
crude oil prices (Indian Basket), which averaged
US$112 per barrel during 2011-12 declined by
4.3 per cent to US$107 per barrel during 2012-
13 (up to September). Though crude prices have
moderated from the levels witnessed in March
2012, the depreciation of the rupee, partly offset
the favourable impact (Table VI.2).
VI.16 A stable rupee since the second half of
September 2012 resulted in some moderation
in the prices of freely priced fuel products in
October 2012, as crude oil prices continued to
remain range-bound. Pressure on fuel inflation
could soften if crude prices remain range-bound
and rupee maintain a strengthening bias.
VI.17 The increase in electricity prices could
further add to input cost pressures. The
uncertainty regarding coal supply prospects
following the de-allocations of many coal
blocks by the government could also be a source
of price pressures, if they are not compensated
by imports. One positive impact of the revision
in electricity prices is the improvement in the
financial conditions of the State Electricity
Boards (SEBs). With more grid power
forthcoming as a result of financial improvement
in the SEBs, there will be less dependence on
genset power, thereby possibly reducing overall
energy costs for producers.
Generalised inflationary pressures persist
VI.18 Non-food manufactured products
inflation, the indicator of generalised inflationary
pressures, remained above 5 per cent during
2011-12 so far (5.6 per cent in September 2012).
The month-over-month seasonally adjusted
annualised changes (3-month moving average)
in WPI non-food manufacturing, though showed
some moderation in the latest month, remain
strong.
Table VI.2: Comparative Movement of Oil Price and Exchange Rate |
|
Sep-11 |
Mar-12 |
Sep-12 |
Change in per cent |
Y-o-Y |
Since Mar, 2012 |
1 |
2 |
3 |
4 |
5 |
6 |
Crude oil Indian Basket (US$/barrel) |
108.8 |
123.6 |
111.8 |
2.7 |
-9.6 |
Exchange Rate (`/$) |
47.6 |
50.3 |
54.6 |
-12.8* |
-7.9* |
Crude Indian Basket (`/barrel) |
5181.9 |
6220.1 |
6104.3 |
17.8 |
-1.9 |
* Indicates the depreciation of the rupee against dollar.
Source: Petroleum Planning and Analysis Cell (PPAC). |
VI.19 Within non-food manufactured products,
the ‘basic metals and metals products’ and
chemicals groups have been the major drivers
of inflation (Chart VI.7). It is seen that the
contribution of these product groups to inflation
in non-food manufacturing has been significantly
high compared to their weights. The recent
pick-up in inflation in this segment has also been
driven by the increase in the contribution of the
textiles group, which had declined significantly
and turned negative during the period of decline
in non-food manufactured products inflation.
Inflation in certain items contributes
hugely to core inflation
VI.20 The contribution of individual
commodities to the increase in non-food
manufactured products prices has also been
asymmetric. A few items, most notably gold and
ornaments, ammonium phosphate and grey
cement, have been contributing
disproportionately to the inflation in non-food
manufactured products inflation. While
assessing the generalised price pressures from
the movements in non-food manufactured
products index, such disproportionate influences
need to be taken into account.
Price adjustments have remained sticky
downwards
VI.21 Manufactured non-food products inflation
has remained persistent during 2012-13 so far.
The number of items showing a price increase
significantly outnumbered the number of items showing a price decline during the period where
non-food manufactured products inflation
remained elevated. Such a trend amidst the
economic slowdown reflects the rigidities in
relative price adjustments, which could keep
core inflation high even when demand pressures
remain muted. However, the reported price
changes within non-food manufactured products
in recent months indicate that the number of
items reporting price increases has declined,
while the number of items reporting price
decreases has increased. This has not translated
into a decline in overall inflation, as large
positive changes in a few discrete items drive
the overall change (Chart VI.8)
VI.22 Although the growth slowdown has been
significant, the input cost pressures continued
to remain persistent as seen from the HSBC
Markit Purchasing Managers Index (PMI).
Firms would be forced to pass on increase in
input costs to output prices as the absorbing
capacity has declined with significant decline
in the profit margins of corporates. This could
also translate to persistence of non-food
manufactured products inflation even with
growth slowdown.
Wage pressures remain persistent and
could constrain inflation moderation
VI.23 A major factor in high food prices and
overall inflation is increase in rural wages; both
in nominal and real terms. However, indications
are that the pace of increase in rural wages moderated from a peak of about 22 per cent
(y-o-y) in August 2011 to about 18 per cent in
August 2012. This, along with an increase in
inflation in rural areas in recent months, led to
a moderation in real wage growth to about 8 per
cent in August 2012 from 11 per cent in August
2011(Chart VI.9). There is a large variation in
inflation and wage growth in rural areas across
the major states, pointing to the presence of state
specific factors in conditioning the wage-price
dynamics (Chart VI.10).
VI.24 It is observed that even in the organised
sector, the growth in staff costs grew at the rate
of about 17 per cent during 2011-12 indicating
persistent pressure from wage costs. After some moderation in the preceding quarters, the
growth in staff costs again picked up in the
recent quarter (Table II.3).
CPI inflation continues to be above WPI
VI.25 Inflation, as per the all-India new
Consumer Price Index (CPI-combined
(rural+urban)) remained elevated, with inflation
for September 2012 at 9.7 per cent. The new
CPI shows some moderation in recent months
when the food and fuel components are
excluded (Table VI.3). However, new CPI
inflation excluding food and fuel component
continues to remain higher than the comparable
component of WPI. The contribution of the food
and beverage group to overall inflation has increased in recent months, albeit marginally
declining in September 2012. This has kept the
overall inflation high even with a decline in
inflation in the core component (Chart VI.11).
The contribution of fuel & power and
miscellaneous items (which includes services)
in CPI inflation has declined in recent months.
|
Table VI.3: WPI and New-CPI (Combined) Inflation |
|
Food |
Fuel |
Excluding
Food and
Fuel |
Overall |
WPI |
New CPI |
WPI |
New CPI |
WPI |
New CPI |
WPI |
New CPI |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Weight |
24.3 |
47.6 |
14.9 |
9.5 |
60.8 |
42.9 |
100 |
100 |
Jan-12 |
1.5 |
3.9 |
17.0 |
13.0 |
7.5 |
10.6 |
7.2 |
7.5 |
Feb-12 |
5.9 |
6.7 |
15.1 |
12.8 |
6.3 |
10.4 |
7.6 |
8.8 |
Mar-12 |
8.7 |
8.1 |
12.8 |
11.8 |
5.8 |
10.2 |
7.7 |
9.4 |
Apr-12 |
9.3 |
10.1 |
12.1 |
11.2 |
5.4 |
10.2 |
7.5 |
10.3 |
May-12 |
8.9 |
10.5 |
11.5 |
10.7 |
5.8 |
10.1 |
7.5 |
10.4 |
Jun-12 |
9.1 |
10.8 |
12.1 |
10.3 |
5.6 |
8.9 |
7.6 |
9.9 |
Jul-12 |
9.0 |
11.6 |
8.4 |
7.3 |
6.5 |
8.5 |
7.5 |
9.9 |
Aug-12 |
9.1 |
12.1 |
8.3 |
7.5 |
6.6 |
8.3 |
7.6 |
10.0 |
Sep-12 |
8.5 |
11.7 |
11.9 |
7.3 |
6.3 |
8.2 |
7.8 |
9.7 |
VI.26 Notably, significant divergences in
inflation as measured by the WPI and the new
CPI were observed in certain product groups
such as condiments & spices, fruits & vegetables
and clothing & bedding. A comparison of
similar item groups under the two inflation
measures indicates that except for fuel and
power, CPI inflation is much higher than WPI inflation in most of the product groups.
Differences in the weighting pattern, area
coverage and coverage of markets could explain
part of the divergence. This could also indicate
that inflation is generally higher at the retail
level than at the wholesale level, which could
be due to factors such as higher transport and
labour costs and rigidities within the supply
chain.
Inflation path remains sticky; better supply
response and enhancing productivity are
critical for medium-term price stability.
VI.27 Persistent inflation, even when growth
has slowed significantly, has turned India into
an outlier in a benign global inflation
environment. From the supply side, high
inflation in India reflects the lagged adjustments
in prices of fuel as well as the role of structural
factors. From the demand side, growth of real
wages in excess of increase in productivity and
high fiscal deficit have added to inflationary
pressures. A sustained moderation in inflation,
therefore, can be achieved through policy
initiatives to address the structural constraints.
Also there is a need to reduce unit labour costs
by improving productivity levels in the economy
so as to enable growth in real wages in a noninflationary manner.
VI.28 Going forward, the deficient and uneven
monsoon and spikes in global food prices have
added to concerns on food inflation. The revision
in administered prices of oil could add to nearterm
price pressures, but could help improve the
macroeconomic fundamentals. Although
manufactured products inflation moderated
during last quarter of 2011-12, it has remained
sticky, as sustained input cost pressures, passthrough
effects and significant wage pressures
offset the impact of the slowdown in growth.
Inflation could remain around the current level
in the near term and any significant moderation
in inflation is conditional on improvements in
structural factors. The inflation path for the
current year in the face of moderation in growth
and the negative output gap continues to be a
concern.
|