Manufacturing provided the deflationary impetus to wholesale inflation in April. Within the wholesale price index (WPI), cooling commodity prices globally are more than offsetting inflation in domestic manufacturing. The commodity cycle is critically dependent on the pace of slowdown in the world economy and, on current indications, the doomsday scenario may have been overstated. Domestic manufacturing could be regaining some of its pricing power after recovering from a stall last year. Here, too, the downside risks to inflation are significant. The surge in demand for services after protracted restrictions is yet to stabilise, adding to the overall upward bias for inflation. Energy import costs could be upended by producer nations seeking higher floor prices.
This picture is clouded by the high base of last year that has pulled CPI inflation within its target band and WPI inflation into negative territory. The Reserve Bank of India (RBI) now has the policy space to assess the impact of its cumulative interest rate hikes over the previous 12 months. But it is unlikely to relax its vigil over inflation as long as internal and external vulnerabilities remain. The central bank expects inflation to tick up after an initial decline in the first quarter. It will seek stability in real interest rates before it applies itself to the question of changing the nominal level.
