Retail inflation at 5 month high; Will MSP hike by government further increase RBI’s headache?

After MSP hike, several estimates placed inflation impact between 50-100 bps on Consumer Price Index (CPI). (Reuters)

After inflation surged in June to a 5-month high, economists expressed concerns about inflation even rising further in the next few months in the wake of the recent MSP hike. The CPI Inflation for the month of June touched 5 percent, according to the data released by the Central Statistics Office (CSO). The government has mandated the Reserve Bank to keep inflation at 4 percent, with a margin of 2 percent on either side. The RBI Governor headed Monetary Policy Committee will be meeting later this month to review interest rate regime.

“The movement has been on expected lines, however, what will become important would be to see how inflation plays out in the coming period, especially in the backdrop of the recent hike in minimum support prices (MSP), high crude oil prices and the pass through of input costs…while the setting in of favorable base impacts may provide some cushion, the MSP hikes may trigger a larger inflationary pressure,” PTI reported citing Anis Chakravarty, lead economist and partner, Deloitte India.

After MSP hike, several estimates placed inflation impact between 50-100 bps on Consumer Price Index (CPI), while fiscal impact would be in the range of 0.2 percent to 0.4 percent of GDP.

“For the statistically minded, our estimate suggests that, post announcement of MSP with 150 per cent hike in cost of production, the CPI inflation could increase by 73 bps and this could materialise in one or two quarters but purely subject to procurement by the Government/State Government,” SBI had  said in its ‘Ecowrap’ report released recently.

The retail inflation based on Consumer Price Index (CPI) was 4.87 percent in May. It was 1.46 per cent in June 2017. The earlier high was in January this year at 5.07 per cent. The inflation in the food basket was 2.91 percent, compared to 3.1 percent in May.

“Going forward, while base effect is likely to provide some cushion to inflation, elevated oil prices are likely to keep pressure on retail inflation. Another cog in the wheel would be the announced kharif MSP. Our estimate shows that this has potential to add 70 basis points to retail inflation,” The Indian Express reported citing Sunil Kumar Sinha, principal economist, India Ratings.

Source: Financial Express