Food inflation rising close to double-digits pushes up CPI to higher-than-expected 8.6% in April 2014 even as core inflation remains flat at ~7.8%
In April 2014, the Indian Meteorological Department (IMD) forecast southwest monsoon rainfall at 95% of the long period average (LPA) in 2014 with a model error of +/-5%. The IMD has placed the likelihood of sea surface temperatures over the equatorial Pacific Ocean reaching El Nino levels during the monsoon season at 60%. This has raised apprehensions of a weak monsoon exerting upward pressure on prices of food items, which comprise nearly 50% of the CPI basket. However, factors such as enhanced sub-soil moisture, relatively healthy reservoir levels and sufficient levels of buffer stock of cereals may help mitigate the impact of a sub-par monsoon.Additionally, the resumption of diesel price hike in May 2014 after a gap of two months, would also keep the CPI inflation trajectory elevated. Moreover, inflation related to various services, which has exhibited stickiness in recent months, is unlikely to ease appreciably in the near term.
With food inflation inching upto 9.8% in April 2014 and the forecast of a below-normal monsoon, the monetary stance is expected to remain cautious in the upcoming monetary policy review in June 2014, with a high likelihood of a status quo with respect to the policy rate. Subsequently, the timing, magnitude and spread of south west monsoon rainfall would crucially impact the trajectory of food inflation as well as success in containing CPI inflation below the RBI's target of 8% by January 2015.
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