Citing the expectations of increasing pressure on food prices as well as uptick in global oil and commodity rates, the ratings agency Crisil in its latest report has said that Consumer price index (CPI)-based inflation is likely to average higher at 5 percent in the fiscal 2018, 30 bps higher than in fiscal 2017. As per the report, CPI based inflation averaged 4.6 percent in the first 11 months of 2016-17 and could be about 4.7 percent for the entire fiscal ended March 31, 2017.
The ratings agency has said that inducements to inflation are indeed many in the road ahead. To wit, pent-up demand after demonetisation, lower bank lending rates, the second tranche of payments based on the Seventh Pay Commission recommendations and an uptick in global oil, metals and agri-commodity prices after about 3 benign years. It added that not surprisingly, the sharper-than-expected fall in inflation over the past few months has already started correcting as remonetisation gained currency.
According to the report, some of the key factors to influence food inflation in FY18 are higher global prices, risk of El nino on monsoons, fading demonetisation effect on perishables goods. It also said that food price pressures could build up anew if El Nino disrupts the south-west monsoon this year, while core inflation, which has been sticky, could also edge up if domestic demand improves.
Moreover, the rating agency expects the global prices to rise 7.8 percent for current financial year. This, along with a weaker rupee, will put upward pressure via imported inflation. It added that currently, the rupee has been appreciating, which is beneficial to inflation, however, the trend is not expected to continue. The rupee could see some weakness in fiscal 2018 as the dollar strengthens on the back of anticipated reforms, Fed rate hikes and stronger recovery in the US.