- Wealth PMS
Consumer Price Inflation for May 2016 is at a near-two-year high at 5.76%. This is the highest we’ve seen this number at since September 2014. Remember that the RBI’s mandate now is to keep inflation within a 2% range of 4% – meaning, it needs to keep inflation within 6%.
The only good news is that there’s a monsoon on that seems to be better than last year. And of course, we did see prices flatten last year till May. So a higher base may result in a lower number in June.
The bad news is that recent fuel price hikes will be factored in only in July. Fuel inflation was only 3% in May, but is going to look like 7% in June. (Petrol prices were up 4% in early June)
Component wise, the biggest impact is in food. It’s literally food that’s pushed inflation up this much as most of the others are still below 6%.
While not super-serious, inflation in both urban and rural areas seems to be up:
This isn’t very bad right now but it negates the basis for a rate cut in the near future. The 10 year bond has moved to a quick 7.52% and this was before inflation data came out – so obviously someone knew.
India isn’t really seeing the back of inflation broken. We are repeatedly seeing spikes in prices of food, and dals are still at Rs. 200 per kg. While we didn’t benefit from fuel prices when crude fell, we are seeing all of the increase in crude prices on the way up. Service tax has increased, and now we have new taxes of all sorts (dividend tax, equalization levy etc) Steel prices have been set at a minimum import level to protect some inefficient players in the steel industry. At this rate, RBI will have no choice but to hike interest rates if the government doesn’t act fast to keep prices down.