By Shivangi Acharya and Sarita Chaganti Singh
NEW DELHI, May 12 (Reuters) – India’s retail inflation rose marginally to 3.48% in April, driven by dearer food prices, government data showed on Tuesday, but the outlook remains clouded by risks from rising energy costs tied to the Middle East conflict.
April’s reading came in below a Reuters’ projection of 3.8% and close to March’s 3.4%. The April data is the highest in the new series launched in January this year with a revised basket of goods and a new base.
Annual inflation remains below the central bank’s 4% target, but is expected to rise in the coming months as higher global oil prices increasingly feed into domestic costs.
The rising energy bills risk widening the current account deficit, weakening the rupee and adding to price pressures for the world’s third-largest oil importer. This year’s monsoon season, expected to be deficient, is also likely to push up food prices in the months ahead.
Food inflation was at 4.2% in April, compared with March’s 3.87%.
India is yet to raise retail fuel prices following the surge in global crude costs, allowing oil retailers to bear losses instead. India will need to assess how long prices can remain low, the country’s federal oil minister said on Tuesday.
A hike in petrol and diesel prices will lead to a reset in prices across segments, including transportation, and push up the headline inflation rate.
“The risks to inflation remain skewed towards the upside (due to) higher energy prices, rupee weakness as well as any disruptions due to El Nino during the monsoon season,” Sakshi Gupta, economist at HDFC Bank, said.
With the surge in energy prices also pressuring the rupee and external balances, Prime Minister Narendra Modi has urged a series of austerity measures to conserve fuel and foreign exchange.
The Indian rupee sank to a record low of 95.7375 on Tuesday, taking losses since the Iran war broke out to nearly 5%. A weaker rupee pushes up prices of imported goods and adds to inflation.
“WAIT AND WATCH”
The Reserve Bank of India has kept interest rates steady as headline inflation remains modest, but economists say a sustained rise in fuel and food costs could narrow room for future policy easing and tilt the scales towards rate hikes later in the year.
“We expect RBI to remain on a wait-and-watch mode for now to assess the pass-through of the risks. However, the risks for early rate hikes (probably from October onwards) are building up,” said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank in Mumbai.
Core inflation, which excludes volatile items such as food and energy and is an indicator of demand in the economy, stood between 3.3% and 3.4% in April, according to estimates by two economists, close to its level in March.
(Reporting by Shivangi Acharya; Editing by Janane Venkatraman)
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