Inflation to average at 5 % in FY`18: Crisil

Mumbai: CPI inflation is likely to average higher at 5 percent in the current fiscal on expectations of increasing pressure on food prices as well as uptick in global oil and commodity rates, says a Crisil report.

Consumer price index (CPI)-based inflation averaged 4.6 percent in the first 11 months of 2016-17 and could be about 4.7 percent for the entire fiscal ended March 31, 2017.

"Inducements to inflation are indeed many in the road ahead. To wit, pent-up demand after demonetisation, lower bank lending rates, the second tranche of payments based on the Seventh Pay Commission recommendations, and an uptick in global oil, metals and agri-commodity prices after about 3 benign years," rating agency Crisil said.

"Not surprisingly, the sharper-than-expected fall in inflation over the past few months has already started correcting as remonetisation gained currency," it added.

It also said that food price pressures could build up anew if El Nino disrupts the south-west monsoon this year, while core inflation, which has been sticky, could also edge up if domestic demand improves.

"Given the predicament, we foresee CPI inflation averaging 5 percent in fiscal 2018, 30 bps higher than in fiscal 2017," Crisil said.

According to the rating agency, higher global prices, risk of El nino on monsoons, fading demonetisation effect on perishables goods are potential upside risks to food inflation in 2017-18, one of the key factors to influence CPI inflation.

"Interestingly, the drivers of food inflation have changed over time. While monsoons had a dominating influence on food in the past, of late global prices have been steering it," the report noted.

Besides, the report noted that demonetisation impacted perishables more, but that effect of the move is waning.

Moreover, the report said that while global oil and commodity prices were benign so far, they are now rising.

"In fiscal 2018, we expect global oil prices to rise 7.8 percent," the report said.

"This, along with a weaker rupee, will put upward pressure via imported inflation," it added.

Currently, the rupee has been appreciating, which is beneficial to inflation, however, the trend is not expected to continue.

"The rupee could see some weakness in fiscal 2018 as the dollar strengthens on the back of anticipated reforms, Fed rate hikes, and stronger recovery in the US," the report said.

Accordingly, Crisil observed that RBI's monetary policy "might have to clearly articulate the glide path to the 4 percent CPI target in the medium term".