- Zero maintenance charges
- Zero fees for demat account opening
- Volume based brokerage
Read More >
-
How to stop loving the recent inflation data and start worrying about its sustainability
August inflation data was soothing, but will it last long?
Publish Date: September 19, 2018
The Indian economy needed a dose of good news. And it got one in the shape of the August inflation data. The tonic was needed because for weeks now, the economy’s nerves have been shot battling high global crude oil prices and consistent weakening of the rupee.
At 5.30pm on Wednesday (September 12), it was officially confirmed that India’s consumer price index (CPI) fell below 4% for the first time since 2018. The inflation rate fell to a pleasantly-unexpected 3.69% from the previous month’s 4.17%. The headline data were lower than anticipated: Bloomberg’s survey of 41 economists had calculated the number to be around 3.77%, the Reuters’ poll had forecast 3.86% and the Monetary Policy Committee has predicted inflation to be around 4%.
On closer scrutiny though, the data was a mixed bag. While prices of vegetable and pulses fell in August, the fuel component of the index showed no signs of deceleration.
The current month’s food inflation was 0.29% as against 1.37% in July 2018. The food inflation was low because vegetable prices dropped to -7% in August (as against 2.19% in July) and pulses remained cheaper (-7.76%).
Our internal estimate suggests that retail inflation will inch towards 4.8% by March 2019 due to higher core inflation (it excludes food, energy and fuel) and introduction of higher minimum support prices for farmers. The data may change further owing to the ongoing trade war between China and the US, currency depreciation and global financial markets volatility.
Rising fuel costs: No end in sight
The fuel costs, meanwhile, rose to 8.47% in August from 7.96% in the previous month. The reasons for the consistent rise in fuel prices are for all to see: large rises in crude oil prices over the past 12 months have resulted in fuel getting dearer each month.
It is a double whammy for the Indian economy because it imports close to 80% of its oil requirement. The weakening rupee hasn’t helped matters either. It means India has to pay more for oil imports, which has consequently squeezed the country’s current account deficit.
There’s a small matter of the Iran sanctions too. If India does stop importing oil from Iran from November 4 onwards, the crude oil prices will increase further. You can read all about the Iran dilemma by clicking here: a href="http://www.kotaksecurities.com/ksweb/articles/how-high-crude-oil-prices-..." target="_blank" style="color:#1f66b2;">How the Iran dilemma will impact India.
The petroleum and natural gas ministry had earlier estimated that if the average crude oil prices were at $65 per barrel for the year, the country’s oil import bill would shoot up by 20% to $105 billion. The bad news is that the crude oil prices have been hovering around the $80-mark in recent days and is likely to stay put for the next few months.
The high crude prices in recent weeks have driven up petrol and diesel prices in India, sparking nationwide protests. But the government is yet to find a solution to the problem.
One way to reduce the high fuel costs in India, analysts say, is to reduce tax. But the government argues that even a 1% reduction in taxes would cost them Rs 30,000 crore annually. The second option is to cap the retention price to about $70 a barrel. But energy companies have reportedly complained of this idea not being sustainable.
Related read: What can government do to stem the rupee slide
Core inflation reduced to 5.18% in August, down from 6.2% in June. We believe the average core inflation to remain around 5.7% in FY2019 despite the low base numbers brought about by GST improving this year.
Lack of a clear plan to battle the rising fuel costs in India is likely to impact the inflation in coming months. That’s because a spike in fuel costs increase the prices of metals and disrupts the supply chain of raw materials. Basically, the costs of raw materials go north when oil prices increase, which impacts the headline inflation numbers.
Food prices: MSP may drive up prices
Just like it happened this time, can low food prices offset rising fuel costs in the country?
That looks unlikely.
On Wednesday, the Cabinet made sure that farmers receive a minimum support price (MSP) for their crops. Under the ‘Price Deficiency Payment’, farmers will receive compensation from the government if the average monthly price of oilseeds is lower than the MSP.
The government has launched another policy titled ‘Price Support Scheme’, where central agencies will step in and procure commodities if the price is below the MSP. The farmer can choose from either policies or even seek help from private players to get compensation for their produce.
The new policy, which will broaden its ambit going forward, will likely drive up food prices.
The other concern is the below-average rainfall in August and September. The India Met Department reckons that there is a 47% chance that the rainfall in the second half of the monsoon may be below average. A below-average monsoon may spike food prices in coming months because rain is vital for India’s farm output. Lower crop production will only send food prices in one direction.
Inflation paradox
The current scenario has thrusted the Reserve Bank of India on the horns of dilemma: should it cut borrowing rates to curb inflation or should it bide its time? The fact that inflation is low at the moment but is likely to rise in the future has put the RBI in an unenviable situation. Analysts are red-hot in discussion about whether borrowing rates should be raised or not (we believe the RBI will announce a 25 basis points hike in borrowing in October). In short, the paradox has got everyone jumpy.
The same can be said about the economy. The low inflation numbers did bring some relief to the embattled economy, but questions over its sustainability has frayed the nerves again.
Also read
- Our stock recommendations
- Check out our market strategy reports
- Understanding valuations is key to IPO investing
- Emerging markets have taken a beating: All you need to know
- Need advice before investing? Click here
Click here to go back 
