Data released on Monday showed retail inflation dipping to a 25-month low of 4.25% in May, inching closer to the Reserve Bank of India’s target rate of 4%.
“The continued decline in cereals and milk inflation is also a positive news, which will help in easing off pressure in prices at the retail level,” said Paras Jasrai, senior analyst, India Ratings and Research.
The gap between the Consumer Price Index (CPI) inflation and Wholesale Price Index (WPI) inflation widened to 773 basis points in May from 562 basis points in April.
Experts said this should help moderate retail inflation though the pass through from wholesale to retail inflation has been slow.
“We expect retail inflation to be on a moderating trajectory in the near term, which suggests the MPC is likely to be on hold for the rest of the fiscal 2023-24,” said Rahul Bajoria, head, EM Asia (ex-China) economics, Barclays.
Nominal GDP
Lower wholesale inflation could also lead to the nominal GDP growth coming below expectation, which could make fiscal targets difficult.”The softer nominal GDP growth represents fiscal slippage risks, as tax revenues could undershoot budget estimate,” said Gaura Sengupta, India economist, IDFC First Bank. IDFC expects FY24 WPI to be 0.96%.
“Expenditure moderation will be required to attain the Centre’s FY24 fiscal deficit target of 5.9% of GDP.” The union budget presented in February projected a 10.5% nominal GDP growth in FY24.
Broad-based decline
The deflation increased in all three main WPI categories-manufacturing products, primary articles, and fuel and power.
The fuel and power category slipped into deep 9.2% deflation compared to a 0.93% inflation, hitting a 31-month low.
On the other hand, primary articles inflation hit a 36-month low of -1.79% in May from a 1.6% rise in April. Wholesale prices of food articles followed the trajectory of consumer prices.
Manufactured products, which have nearly two-thirds of weight in the WPI, saw deflation increase to 2.97% in May compared with a 2.42% decline in the preceding month.
“Falling global commodity prices across metals, energy, cotton are contributing to deflation in manufacture of basic metals, textiles, chemicals, among others,” said Bajoria.
Sequentially, wholesale prices had declined 0.86% in May.
In the foods category, vegetables and oil seeds contributed the most to the deflation.
Outlook
A waning base effect is expected to lift wholesale inflation going ahead, but it is likely to remain low.
“Base effects in weighing on the WPI are likely to fade from June onward, though the headline print may remain in deflation on a YoY basis in the near term,” said Bajoria.
Ratings agency ICRA expects WPI deflation at 2.5-3.5% in June 2023.