- Inflation based on the consumer price index came in at an uncomfortable 22 month high of 5.8% on a year on year (yoy) during May 2016. It also rose for the 3rd consecutive month, and remained above 5%, which is RBI’s informal January 2017 target, for the 2nd month running. The wholesale price index (WPI) also stayed firmly in the inflationary zone for the 2nd month straight, though the number by itself is a minimal 0.8%.
-There was good news on the external economy front, as the latest Balance of Payments report revealed a decline in current account deficit to 1.1% of GDP for the year 2015-16 from an already contained 1.3% during the previous year. Further, the deficit for Q4 2015-16 slowed down to a seven year low of USD 0.3bn. Foreign investment flows showed a mixed picture, as FDI was robust but portfolio inflows showed a sharp decline from last year.
-Monthly merchandise foreign trade data for May gave hope for return of health in the near future with respect to both exports and imports. However, foreign tourist arrivals, a proxy for global economic trends, slowed down.
-The RBI governor revealed his intention to end his term in September 2016.
Focus: Inflation Spike
Inflation based on the Consumer Price Index (CPI) increased to 5.8% in May 2016, touching a 22 month high. CPI inflation has started 2016-17 on an uncomfortable note, coming in above the RBI’s informal January 2017 target level of 5%. The number needs to be watched carefully for further developments, since price rise remains a key policy concern, particularly in so far as growth is yet to pick up sustainably, which creates two conflicting economic challenges.
As per the split up of CPI across components, ‘Pan, tobacco and intoxicants’ shows the highest inflation at 7.8%, though this is still an improvement over the 9.5% levels witnessed during the corresponding period of the previous year. In contrast, ‘Food and beverages’ inflation followed ‘Pan, tobacco and intoxicants’ at 7.2%, however, in this case inflation has actually spiked from 5.1% seen during May 2015. A similar case is seen for ‘Housing’ inflation, which, which has also reported an appreciable increase from the previous year. On the other hand, segments like ‘Clothing and footwear’, ‘Fuel and light’ and services inflation have either shown a decline from the previous year, or a small increase only.
WPI remained in inflation territory for the second consecutive month in May 2016, coming in at 0.8%. At these levels, the difference between CPI and WPI – loosely representing producers’ margins – stands at a 1 year low of 5 percentage points.