The Reserve Bank of India’s (or RBI) primary gauge of inflation is the consumer price index (or CPI). In India, another measure of inflation, the wholesale price index (or WPI), is important as well. To know more about these measures of inflation, please refer to India’s different inflation measures—WPI versus CPI.
CPI inflation has evolved according to the RBI’s glide path, which has helped the central bank in easing its monetary policy further. As shown in the graph below, CPI inflation fell for the first time in seven months in February 2016 due to the declining vegetable and pulse prices. This decline was not due to favorable base effects, which is good because favorable base effects wear off quickly, leading to a surge in inflation readings later.
The risks to inflation
Though CPI inflation has come down, certain risk factors could cause it to rise again. One of them is the increase in the service tax rate that became effective on April 1, 2016. This increase means that Indians will be paying more for the same services. Even in the absence of an increase in real demand, inflation will increase, as the tax levied on services was raised in the budget.
Another aspect that could pressure inflation is the pay increases to public sector employees as recommended by the seventh Pay Commission.
Monsoon rains have been deficient in India for the past two seasons. The RBI stated that a normal monsoon “would work as a favorable supply shock,” which could impact CPI inflation.
Though not an immediate risk, a rebound in energy prices (HES) (SLB) (SUN) would be hurtful to India’s CPI inflation, as India is a large oil importer. Some India-focused funds (EPI) (INDAX) have a large exposure to the energy sector, which will benefit if energy prices rise.
Investors should keep an eye on these factors before rebalancing their India-focused investments. Visit our mutual funds page for the latest developments.