Growth slowdown, softer commodity prices, range-bound exchange rate in recent months and
past monetary policy actions contributed to the moderation of headline inflation to 6.0 per cent
(provisional) in March 2013 from 7.7 per cent in March 2012. inflation, however, continues to
remain above comfort level. The divergence between WPI and CPI inflation widened, reflecting
high food inflation, which is a source of concern. Headline inflation in 2013-14 is expected to
remain range-bound around the current level. While sluggish global growth may dampen global
inflation risks, domestically energy price adjustments, supply-side bottlenecks, including that of
food, and sustained wage pressures may offset the moderation of inflation resulting from growth
moderation and past monetary policy actions.
Global inflationary pressures remained
muted in 2012-13
VI.1 Global inflation continued to remain
muted against the backdrop of fragile and
uneven global economic recovery. In advanced
economies (AEs), weak demand pressure and
high unemployment rate contributed to low
inflation. The April 2013 World Economic
Outlook (WEO) projected the consumer price
inflation in the AEs to moderate to 1.7 per cent
in 2013 from 2.0 per cent in 2012. In emerging
market and developing economies (EMDEs),
it is projected to remain at 5.9 per cent in
2013, same as in the previous year.
VI.2 Low inflation, even below the inflation
targets in the case of several AEs, provided
space to extend their monetary accommodation
through unconventional monetary policies.
Policy rates in several AEs remained at
the zero lower bound, prompting them to
undertake further doses of quantitative easing
(QE) (Table VI.1). Some other AEs that had
space lowered policy rates further. The central
banks of AEs continue to stimulate protracted
recovery along with well-anchored inflation
expectations. While the immediate risk of
global inflation resurgence remains low, once
recovery shapes up, inflation concerns could
resurface given the presence of excess global
liquidity.
VI.3 Although consumer price inflation
generally remained moderate in the case of
EMDEs, some EMDEs, including India, the Middle East, Sub-Saharan Africa and some
East European countries, faced high inflation
in 2012. India emerged as an outlier among
BRICS and the G-20 nations with double-digit
CPI inflation (Table VI.1). India’s high CPI
inflation remains a worry in the context of its
increased openness and on account of welfare
implications.
Global commodity prices exhibit softening
bias
VI.4 The year 2012-13 was marked by
stable oil and food prices and softer prices
for metals, beverages and agricultural raw
materials. Metal prices, after falling until
August 2012, witnessed an uptrend in
subsequent months (Chart VI.1). However,
global oil and non-oil commodity prices
witnessed marked correction during April
2013, reflecting improved supply prospects and weaker global growth expectations. Global
food prices continued to remain range-bound.
Food and Agriculture Organisation (FAO)
assessment indicate improved food supply
outlook for 2013 on account of favourable
production prospects.
Table VI.1: Global Inflation and Policy Rates |
Country/
Region |
Key Policy Rate |
Policy Rate
(as on April 27, 2013) |
Changes in Policy Rates
(basis points) |
CPI inflation
(y-o-y, Per cent) |
Sep. 2009
to
Dec. 2011 |
Jan. 2012 to
Apr. 2013 |
Mar-12 |
Mar-13 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Advanced Economies |
Australia |
Cash Rate |
3.00 (December 5, 2012) |
125 |
(-) 125 |
1.6# |
2.5# |
Canada |
Overnight Rate |
1.00 (Sep. 8, 2010) |
75 |
0 |
1.9 |
1.0 |
Euro area |
Interest Rate on Main Refinancing Operations |
0.75 (Jul. 11, 2012) |
0 |
(-) 25 |
2.7 |
1.7 |
Israel |
Key Rate |
1.75 (Jan 1, 2013) |
225 |
(-) 100 |
1.9 |
1.3 |
Japan |
Uncollateralised Overnight Call Rate |
0.0 to 0.10* (Oct. 5, 2010) |
(-) 10 |
0 |
0.5 |
-0.9 |
Korea |
Base Rate |
2.75 (Oct. 11, 2012) |
125 |
(-) 50 |
2.6 |
1.3 |
UK |
Official Bank Rate |
0.50 (Mar. 5, 2009) |
0 |
0 |
3.5 |
2.8 |
US |
Federal Funds Rate |
0.0 to 0.25* (Dec. 16, 2008) |
0 |
0 |
2.7 |
1.5 |
Emerging and Developing Economies |
Brazil |
Selic Rate |
7.50 (Apr. 18, 2013) |
225 |
(-) 350 |
5.2 |
6.6 |
China |
Benchmark 1-year Deposit Rate |
3.00 (Jul. 6, 2012) |
125 |
(-) 50 |
3.6 |
2.1 |
Benchmark 1-year Lending Rate |
6.00 (Jul. 6, 2012) |
125 (600) |
(-) 56 (-150) |
|
|
India |
Repo Rate |
7.5 (Mar. 19, 2013) |
375 (100) |
(-) 100 (-200) |
9.4 |
10.4 |
Indonesia |
BI Rate |
5.75 (Feb. 9, 2012) |
(-) 50 |
(-) 25 |
4.0 |
5.9 |
Philippines |
Reverse Repurchase Rate |
3.50 (Oct. 25, 2012) |
50 |
(-) 100 |
2.6 |
3.2 |
Repurchase Rate |
5.50 (Oct. 25,2012) |
50 |
(-) 100 |
|
|
Russia |
Refinancing Rate |
8.25 (Sep. 14, 2012) |
(-) 275 |
25 |
3.7$ |
7.3$ |
South Africa |
Repo Rate |
5.00 (Jul. 20,2012) |
(-) 150 |
(-) 50 |
6.2 |
6.0 |
Thailand |
1-day Repurchase Rate |
2.75 (Oct. 17, 2012) |
200 |
(-) 50 |
3.5 |
2.7 |
*: Change is worked out from the minimum point of target range. #: Q4 (Jan-Mar). $: February
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 New CPI (Combined: rural + urban)
Source: Websites of respective central banks/statistical agencies. |
Domestic headline inflation moderated as
generalised inflationary pressures eased
VI.5 After remaining in the range of
7.5–8.1 per cent during H1 of 2012-13,
wholesale price index (WPI) inflation (y-o-y)
in India moderated gradually to 5.96 per cent,
(provisional) in March 2013 (Chart VI.2).
Moderation in headline inflation has been
significant even as price pressures continued to
persist from the food and fuel segments. This was facilitated by a decline in manufactured
non-food products inflation, which came down
sharply to 3.5 per cent (provisional) in March 2013, reaching its lowest level in the past
three years. While subdued pressures from
global commodity prices and the range-bound
exchange rate helped the course of downward
movement in the inflation trajectory, the
decline in inflation also reflects the impact
of growth moderation and the weak pricing
power of firms as well as past monetary
policy actions aimed at containing inflation
and anchoring inflation expectations. The
momentum of price changes, as indicated by
3-month moving average seasonally adjusted
month-over-month changes, also moderated in
H2 of 2012-13.
VI.6 Moderation in inflation has not been
commensurate with the slowdown in growth,
in part because structural factors are keeping
prices up, and in part because price softening
was offset by revisions in administered prices,
especially in the fuel group (Chart VI.3). To the
extent that administered price increases keep
headline inflation above market-determined
prices, it reflects the lagged pass-through.
Cereals and pulses emerge as major
pressure points for food inflation
VI.7 Food prices continued to increase
during the Q4 of 2012-13. The contribution
of different items to overall food inflation,
however, changed during the year. After
exhibiting moderate price increases in the
previous year, the price increases in cereals
and pulses became quite significant during the current year (Chart VI.4). The delayed
and skewed south-west monsoon had a
significant impact on the production of cereals
and pulses, which triggered the initial price
spurt. However, despite the presence of large
buffer stocks, price increases continued to be
persistent. It is observed that there has been
a secular build-up in the stock of foodgrains
in recent years that are much above the buffer
norms (see Chapter I).
VI.8 The minimum support prices (MSP)
of most cereals and pulses have increased
significantly in recent years, which has
emerged as an additional source of pressure.
This is particularly true in the case of paddy
(Table VI.2). However, total rice production
fell during 2012-13, due mainly to drought
conditions in parts of Tamil Nadu, Maharashtra
and other rice-producing states.
VI.9 Apart from cereals, volatility in prices
of vegetables and fruits added to domestic
price pressures. Also, inflation in protein-rich
food items continued to remain elevated since,
apart from pulses, price increases have been
significant for eggs, fish and meat. Inflation
in milk, however, moderated over the course
of the year. Manufactured food products
inflation also tracked the trends in primary
food inflation.
Table VI.2: Annual Average Percentage Increase in MSP and WPI |
Commodity |
2002-07 |
2007-13 |
MSP |
WPI |
MSP |
WPI |
1 |
2 |
3 |
4 |
5 |
Rice |
1.8 |
2.1 |
14.0 |
10.0 |
Wheat |
4.0 |
5.8 |
10.7 |
7.8 |
VI.10 Persistent increases in domestic food
prices during 2012-13, despite range-bound
global food prices, calls for a relook at the
overall agriculture price policy, where MSPs
and large buffer stocks are the two major policy
tools. While food security is of paramount
importance in a country such as India,
recent experience suggests that large buffer
stocks have not been effective in dampening
prices, even as the system is bearing large
carrying costs and storage losses. Also,
significant increases in the cost of production
in agriculture, driven largely by the increase
in wage costs, added to pressure on food
prices. As has been highlighted in the past, the
changing pattern of consumption in favour of
protein-rich items has not been matched by
supply elasticities, which added pressure from
the demand side. Addressing these issues by
augmenting supply capacities could be critical
in achieving the goal of stable food prices.
Administered price revisions keep fuel
inflation high and persistent
VI.11 Revision in administered prices largely
shaped the course of fuel inflation during the
year. Given the unsustainable level of subsidy burden arising from administered prices, the
price of diesel was raised by `5 per litre in
September 2012. Also the number of subsidised
LPG cylinders per consumer was capped at six
(which was later raised to nine). In January
2013, the government allowed OMCs to raise
the retail price of diesel in a staggered manner
and to charge bulk consumers the market price
of diesel.
VI.12 Although the revisions in administered
fuel prices led to some decline in the extent
of suppressed inflation, the gap still persists
(Chart VI.5). This has resulted in a substantial
build-up in the under-recoveries of the oil
marketing companies (OMCs) to the tune of
`1.61 trillion during 2012-13, of which 57 per
cent was on account of diesel. The decision
to allow small, step-wise increases in diesel
prices could result in some persistence of
fuel inflation during 2013-14. However, a
gradual and calibrated increase in price to
align it with international prices is desirable,
since large discrete price changes often have a
distortionary impact on inflation expectations.
VI.13 Although there was some moderation
in international coal price, the gap between
domestic and global prices persists. Of the
total estimated domestic demand of about 770
MT during 2013-14, 21 per cent would have
to be met through imports. Greater reliance on
imports for bridging domestic demand-supply
gap could lead to increase in costs which could
reflect in prices.
VI.14 The recent debt restructuring of most
State Electricity Boards (SEBs) would lead
to improved financial positions and, thereby,
improve their sustainability. However, the debt
restructuring is also conditional on significant
increases in prices to make them financially
viable. This is partly reflected in increases in
electricity prices in June 2012, which exerted
upward pressure on fuel Inflation. Further
increases can be expected in the near term.
However, if the improved financial condition
of the SEBs leads to better delivery, the
reliance on more expensive sources of power
such as gensets could decline, which could
lead to a decline in the overall power cost for
firms.
Generalised inflationary pressures ease
as output gap remains negative
VI.15 The major development in Inflation
dynamics in recent months was the marked
decline in non-food manufactured products
Inflation. The month-over-month seasonally
adjusted annualised change (3-month
moving average), which is an indicator of the
momentum of price increases, also indicates
significant moderation in price pressures in
recent months (Chart VI.6).
VI.16 The decline in the contribution of
the metals and chemicals group has been the
major driver of the moderation in Inflation
within the non-food manufactured products group (Chart VI.7). As prices moderated in
the international commodity markets and the
rupee remained range-bound, the benefits got
passed on to domestic Inflation. This reaffirms
the fact that in the absence of offsetting
pressures, generalised Inflation does moderate
with a negative output gap.
Pattern of price changes points to
significant moderation
VI.17 A look at the distribution of price
changes within non-food manufactured
products indicates that during 2012-13,
the share of items exhibiting month-overmonth
increases in prices has gradually
declined, while the share of items reporting
price decreases has increased (Chart VI.8).
This points to the presence of a strong
disInflationary momentum, which further corroborates the weak pricing power. The PMI
input and output price indices in recent months
exhibited moderation, further pointing towards
moderation of Inflation pressures.
VI.18 During the three-year period of high
Inflation (2010-11 to 2012-13), the month-to-month volatility of all-commodities WPI
Inflation declined, reflecting its persistence.
During 2012-13, the declining volatility reflects
gradual moderation in overall Inflation. The
relative price variability across commodities,
which was high in 2011-12, also declined
during 2012-13, suggesting that softening of
Inflation has occurred in a generalised manner
Chart VI.9 (a & b).
Wage growth pressures persist, although
with some moderation
VI.19 Persistent pressure from wages
remains a major risk to Inflation moderation.
Although the pace of increase of rural wages
moderated, it continues to be in double digits.
However, the sharp increase in Inflation in
rural areas in recent months led to significant
moderation in real wage growth (Chart VI.10).
State-specific factors continue to play a major
role in wage-price dynamics, with significant
variation in Inflation and wage growth being
observed across the major states (Chart VI.11).
VI.20 In the private corporate sector, the
increase in staff costs remained significant,
indicating persistent pressure from wage costs
(see Chapter II). The results of the Annual
Survey of Industries (available up to 2010-11)
also show double-digit growth in wages in the
factory sector, pointing towards pressure on
industry from high wages.
Divergence between WPI and CPI
inflation widened
VI.21 Since December 2012, Inflation as
measured by the all-India new Consumer
Price Index (CPI-combined: rural + urban)
remained in double digits even as WPI
Inflation moderated, leading to a widening of the gap between the two (10.4 per cent and 6.0
per cent in new CPI and WPI, respectively, in
March 2013) (Chart VI.12). This divergence is
on account of several factors. Both the higher
weight of food in the new CPI (47.6 per cent)
compared with the WPI (24.3 per cent), and
higher food Inflation in new CPI at 12.4 per
cent compared with 8.1 per cent in WPI for
March 2013 contributed to the divergence. In
particular, new CPI Inflation for vegetables, oils
& fat, milk, sugar and eggs, fish & meat was
higher than that in the WPI possibly reflecting
trade and transport margins and other supply
chain inefficiencies. Also, housing, which is
only part of the new CPI, exhibited double-digit
Inflation.
Consumer price inflation in some
commodities diverges between rural and
urban areas
VI.22 There were large divergences in
Inflation by commodity groups in rural and
urban areas (Chart VI.13). The fuel & light
group witnessed higher Inflation in urban
areas. Inflation in clothing, bedding and
footwear was higher in rural areas in recent
months. While overall food Inflation remained
more or less the same between rural and
urban areas. However, within food groups
there was significant divergence in Inflation
trends. Inflation was higher in cereals, pulses,
‘eggs, fish and meat’ and prepared meals in
urban areas, while ‘milk & milk products’,
‘condiments & spices’, sugar and edible oils
recorded higher Inflation in rural areas. These
divergence in Inflation may also in part reflect
supply chain inefficiencies across various
regions but it needs a thorough examination.
Regional variation in inflation remains
significant
VI.23 Though starting at around the similar
rate of 10 per cent in May 2012, CPI Inflation
across various regions of the country exhibited
significant divergence in recent months.
Notably, the north-eastern region witnessed
lower Inflation than the rest of the country
(Chart VI.14). Inflation differential across
regions could be due to region-specific factors,
such as the composition of the consumption
basket and transport costs. State-specific
government policies, such as the availability
of fair price shops and restrictions on interstate
movement of goods could also lead to the
differences in Inflation.
VI.24 Recent trends in the prices of selected
food articles collected across various regions
by the Reserve Bank indicate further firming up
of the prices of cereals, both in the wholesale
and retail markets, while prices of pulses
showed some moderation. The average markup
in the prices between retail and wholesale
markets during Q4 of 2012-13 were sustained
in the range of 7–20 per cent for cereals and pulses, and it varied in the range of 22–45 per
cent for perishable items, including vegetables,
fruits and fish.
Headline inflation is expected to remain
range-bound during 2013-14
VI.25 Going forward, the growth slowdown and the lagged impact of past monetary
policy actions are expected to keep Inflation
moderate from the demand side. The recent fall in global commodity prices and subdued
demand conditions may result in some further
moderation in headline Inflation in the coming
months, but overall Inflation is likely to stay
range-bound. From the supply side, price
adjustments in diesel, coal and electricity,
when effected, may offset the Inflation
moderation due to slack demand. Moreover,
food Inflation remains a major pressure point
accentuated by continuing supply bottlenecks.
A sustained moderation in food Inflation
would entail greater emphasis on removing
supply bottlenecks and raising agricultural
productivity. The near-term path of food
Inflation, however, is also contingent upon
the performance of the monsoon. The global
environment remains uncertain, and despite
the recent moderation, possible upswings in
fuel prices or depreciation of the exchange
rate pose further upside risks. Risks also stem
from the possible wage-price spiral and high
Inflation expectations. In view of these factors,
the monetary policy has to continue its close
vigil on the Inflation front while continuing to
facilitate growth recovery.
|