According to a Reuters survey of economists, consumer price inflation in India likely edged up in June, ending a five-month drop, owing primarily to an increase in vegetable costs caused by crop damage caused by extreme weather. Prices for tomatoes, onions, and potatoes, which are staples in every Indian household, rose by double digits last month as excessive heat and major flooding in India's northern regions hindered agricultural production.
According to a Reuters poll of 54 experts conducted on July 5-9, consumer price inflation climbed to 4.80 percent last month compared to 4.75 percent the previous year. Food accounts up around half of the whole CPI basket. Forecasts for the data, which is due on July 12 at 1200 GMT, varied between 4.10 percent and 5.19 percent.
"A sharp spike in vegetable prices, along with cereals and pulses, kept food inflation at higher levels and nullified the softness in eggs, fruits, and spices prices," said Kanika Pasricha, Chief Economic Advisor at Union Bank of India.
"Core inflation likely stayed flat at all-time lows of 3.10 per cent as gold prices eased somewhat during the month and commodity prices also remained under pressure." Core inflation, which excludes volatile commodities such as food and energy and is considered a stronger indicator of domestic demand, is expected to be 3.10 percent in June, according to the median estimate of a smaller sample of 19 economists.
The Indian statistics agency does not disclose core inflation data, but experts estimate it using CPI data, and some may publish new estimates after Friday's report. Many analysts believe that despite the economy rising by more than 8% last fiscal year, the current drop in core inflation implies overall weak domestic demand in an economy where private spending accounts for roughly 60% of GDP.
Some also believe that a telecoms tariff hike effective this month will put upward pressure on inflation in the coming months, halting further declines in core CPI.
"Given the weight in the CPI basket (for telecoms) and past translation trends, this should push headline CPI up by another 20 bps or so, starting July," said Sajjid Chinoy, Chief India Economist at J.P. Morgan. "If this is a one-time price hike, the RBI should look into it. However, it adds to the uncertainties around the inflation outlook," he added.
With inflation projected to remain above the Reserve Bank of India's medium-term objective of 4% this fiscal year and next, the central bank is expected to decrease interest rates only once this year, in the fourth quarter. Economists expect the US Federal Reserve to begin its easing cycle in September. According to the study, wholesale price index-based inflation likely increased to 3.50 percent annually last month, up from 2.61 percent in May.
