India’s headline retail inflation, measured by consumer price index , came in at 6.3 per cent YoY in May’21, much higher than the Bloomberg consensus of 5.4 per cent. The worry was that higher-than-expected inflation was broad-based, not because of a few items. Earlier in the day, the wholesale price index posted headline inflation of 12.9 per cent YoY, marking the highest level in almost the past three decades. What more, core CPI inflation also surged unexpectedly to 82-months high of 6.3 per cent YoY last month, while core WPI inflation was at 25-year high of 10 per cent in May’21.
India’s headline inflation was 6.3 per cent in May’20 and core inflation was at 5 per cent. In fact, a look at 40 major economies in the world confirms that India was the only nation, which saw higher retail headlines as well as core inflation in CY20 . Even in Turkey, inflation eased from 15 per cent in CY19 to 12 per cent in CY20. First of all, higher inflation in the US is on the back of massive fiscal and monetary stimulus, which was relatively negligible in India.
While the US fiscal deficit more than tripled to 16 per cent of its GDP last year and likely to be in double-digits this year also, India’s combined fiscal deficit was 13 per cent of GDP in FY21 vis-à-vis 7 per cent of GDP in FY20. The US Fed’s balance sheet increased by 77 per cent YoY to 35 per cent of GDP in CY20 , while the RBI’s balance sheet grew by a relatively modest 28 per cent YoY to 30 per cent of GDP . Third, unlike the US, low inflation in India was a very recent phenomenon. The average inflation in the US was 1.56 per cent during the past 12 years , lower than its target of 2 per cent.
On the contrary, the average inflation in India was 4.5 per cent since January 2016, higher than its medium-term target of 4 per cent. Therefore, it is not surprising to see that the US policymakers not only want inflation to come back but are also ready to tolerate the higher levels for some time. In contrast, there is no such plan or wish of Indian policymakers and still, India’s inflation is not only stubbornly high but also higher-than-expected. Therefore, while there is a genuine explanation for rising inflation in the US, India’s inflation may be more durable and out of control of policymakers.
In its recent monetary policy, the RBI raised its inflation projection slightly to 5.1 per cent in FY22 and expected average inflation of 5.7 per cent in May-Jun’21. It is clear that 6.3 per cent YoY inflation in May’21 would impart upside bias to inflation forecasts. Accordingly, we believe that CPI inflation could be 5.5 per cent in FY22.
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