March WPI inflation at 8-yr high; economists see it in double digits in May

Hopes for policy rate reduction in near term dim even as economic uncertainty looms large amid the second Covid-19 wave


Wholesale Price Index Inflation | WPI inflation | WPI-based Inflation

Dilasha Seth  | 
New Delhi 

Wholesale price index-based inflation touched an over eight-year high in March led by soaring fuel prices and manufactured products. The rate of price rise is expected to hit double digits in the near term, led by food and the low base of last year, economists cautioned. This dims hopes for any policy rate reduction in the near term even as economic uncertainty looms large amid the second wave of the pandemic in the country.

Wholesale inflation rose to 7.4 per cent in March as against 4.17 per in February and 2.51 per cent in January, data released by the ministry of commerce and industry showed on Thursday. Its retail price counterpart consumer price index released on Tuesday also saw inflation surge to a four-month high of 5.03 per cent in March, on the back of sharp rise in food and core segment.

WPI inflation has printed much higher than our expectation of 6.1 per cent, with faster than anticipated upticks in inflation of core items and fuels. We expect the headline and core WPI to rise further over the next two months, peaking at about 11.0-11.5 per cent and 8-8.5 per cent, respectively in May 2021,” said Aditi Nayar, principal economist, Icra Ratings.

The expected trajectory of the WPI inflation, and its partial transmission into the CPI inflation going ahead, supports our view that there is negligible space for rate cuts to support growth, in spite of the growing uncertainty related to the surge in Covid-19 cases, localised restrictions and emerging concerns regarding migrants returning to the hinterland, added Nayar.

The core-WPI inflation also touched a series-high of 7 per cent in March, led by steep increase in prices of metals, rubber, textiles, chemicals, etc. “…the global prices of many of these have recorded large increases in recent months on the back of the optimism generated by the Covid-19 vaccines’ rollout,” said Nayar.

Annual inflation in FY21 stood at 1.2 per cent, compared to 1.7 per cent in FY20, the lowest in the last five years.

Manufactured products, which accounts for 64.23 per cent of the index, saw inflation rise to a series high of 7.3 per cent in March, from 5.81 per cent in February.

Fuel and power, which has a weight of 13.2 per cent in the WPI, saw inflation touch a 28-month high of 10.25 per cent, compared to 0.58 per cent in February and a contraction of 4.78 per cent in January. The rate of price rise in petrol shot up to 18.48 per cent in March compared to 0.83 per cent in the previous month and a contraction of 7.31 per cent in January. The WPI inflation in diesel was up at 18.27 per cent from a contraction of (-) 0.11 per cent in February and (-) 10.31 per cent in the previous month.

Crude petroleum inflation rose to 73.7 per cent in March from 7.18 per cent in February.

Rahul Bajoria, Chief India Economist, Barclays India said that sharp month-on-month price gains continuing in the fuel and manufacturing segments could become a cause for concern. “We expect WPI inflation to continue to rise for a few more months, possibly reaching double digits the first time since September 2011 in May 2021,” he said.

Food index in March 2021 rose to a five month high of 5.28 per cent in March, compared to 3.31 per cent in the previous month and a contraction of 0.26 per cent in January.

Inflation in pulses surged to 13.15 per cent in March compared to 10.25 per cent in February and that for fruit shot up significantly to 16.33 per cent during the month versus 9.48 per cent in February.

“The near-term inflation outlook is not so rosy, with summer setting in perishable products (especially vegetables) are likely to experience higher inflation, low base of last year will also have an adverse impact of wholesale inflation at least till August 2021,” said Devendra Kumar Pant, Chief Economist, India Ratings & Research.

Economists ruled out scope for policy rate reduction to boost the economy. “Higher wholesale inflation transmits to retail inflation with a lag, this makes job of monetary authorities very difficult. The economy at present juncture needs both fiscal and monetary support (both low rates and ample liquidity). While Ind-Ra expects the policy rates to remain low at the same level and ample liquidity in most of FY22, spurt in wholesale prices may force monetary authorities to withdraw some of the extra ordinary liquidity measures around end of FY22,” said Pant of India Ratings and Research.

The Monetary Policy Committee (MPC) last week left the repo unchanged at 4 per cent. The Centre has kept the inflation target of the monetary policy framework unchanged at 2-6 per cent for the next five years, until the fiscal year 2025-26.

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