CPI inflation rose sharply to 4.6 per cent in April 2018, a little bit higher than market expectations. The uptick was mainly led by core inflation, which exceeded expectations at 5.9 per cent.
The inflation rise in food rose to 4.6 per cent from 2.8 per cent in the previous month, a chronological increase after four consecutive reduction. Vegetable prices narrowed down to 1.6 per cent, while fruit prices increased 4.9 per cent. High frequency mandi data is indicating uptick in vegetable and fruit prices, while prices of pulses and sugar continue to fall.
Headline CPI is expected to head towards 5.4 per cent by June 2018, partly led by an unfavourable base effect, before moderating towards 4.5 per cent by the end of FY19. Headline and core inflation will likely average 4.6 per cent and 5.6 per cent in FY19 against 3.7 per cent and 4.4 per cent in FY18.
Upside risks exist due to oil and other commodities shocks amid a weak rupee, impending MSP hikes for Kharif crops, and possible implementation of States HRA. A $10 increase in crude could have a 40-50bps impact in FY19 through a commensurate increase in petrol, diesel, LPG etc.
Amid various inflation uncertainties, CPI inflation outturn will be crucial in assessing the RBI’s next move. While the probability of a rate hike has increased amid several uncertainties on inflation, RBI may still be on a pause mode for some more time while assessing the incoming data closely.