The Consumer Price Index (CPI) and Wholesale Price Index (WPI) numbers for March, published on Monday and Tuesday, respectively, indicate that inflationary pressures remain quite subdued. Against a backdrop of widespread concerns about a resurgence in food prices as a consequence of adverse weather conditions, the CPI numbers came in as a positive surprise. Headline inflation was 5.17 per cent year-on-year, more or less in line with the readings over the past few months. More significantly, the food component registered a 6.14 per cent increase over a year ago, notwithstanding the persistently hostile weather. This is in contrast to the over eight per cent increase seen in March 2014, when weather conditions were hardly unfavourable. Of course, there is always the fear that prices will start increasing in the months ahead, particularly if the monsoon this year turns out to be below normal. However, the price of cereals increased by a mere 2.32 per cent year-on-year during March, hardly a sign of impending supply disruptions, even if open market sales by the government are taken into account. Vegetable prices, a thorn in the side of the government and the Reserve Bank of India for the past few years, increased by a relatively modest 11.26 per cent. Since vegetables are typically grown in short cycles, weather-related disruptions in supply do not persist. Overall, these numbers suggest that fears of a significant hardening of inflation as a result of a poor rabi season may be overblown.
The WPI continued to decline in absolute terms, with the rate of decline increasing somewhat. Inflation was -2.33 per cent year-on-year during March, compared with six per cent a year ago. This was the fifth successive negative reading. Wheat prices actually declined, contrary to weather-induced expectations. Of course, the largest contributors to the disinflation were fuel prices, which declined by over 12 per cent year-on-year. The prices of manufactured goods also declined, though marginally. This could mean that producers are only partially passing on the benefits of softer commodity prices to consumers, which does suggest a return of pricing power to the manufacturing sector, presaging some recovery in a relatively sluggish profitability pattern. The disinflation phase appears to be bottoming out, but a sharp reversal in inflationary pressures seems unlikely.
In short, the combination of tight monetary policy, softer commodity prices and price stabilisation measures for food has worked. Inflationary pressures have been contained and, more importantly, been resistant to bad weather. While not dismissing the risks associated with a sub-optimal south-west monsoon, these numbers do raise questions about the RBI's monetary policy stance, which, just last week, preferred not to cut the policy rate partly because of food price risks. If next month's readings reinforce the perception that the weather impact has been relatively mild, there will be pressure to reduce rates in response to the April inflation numbers. If that were to happen, it would be the third successive off-schedule action by the RBI. Given the sensitivity of policy actions to monthly inflation numbers, it might be more efficient for the central bank to change its calendar and have its bi-monthly reviews in the middle of the month, rather than at the beginning or the end.
