Drifting away from its downward trajectory, retail inflation, as measured by the movement of Consumer Price Index (CPI) rose to 8-month high in June 2015. CPI increased from 5.01% in May to 5.40% in June on account of an upsurge in food inflation. On the other hand, inflation measured by the movement of the Wholesale Price Index (WPI) fell to -2.4% in June from -2.36% in May.
 

Retail inflation inched-up yet again

Data as on July 13, 2015
(MOSPI, PersonalFN Research)  

What caused inflation to increase?
Food and beverages that have a weightage of about 45.86% in the CPI rose to 5.48% in the month of June in comparison to 4.80% in May. Inflation in pulses and products climbed to 22.24% in June from 16.62% in the month prior. Inflation in spices rose from 8.82% in May to 9.71% in June. Inflation in protein rich items such as eggs shot up to 5.09% (as against 0.78% in the month prior), while meat and fish to 6.99% (as against 5.43% in the month prior).

Impact on markets
Indian capital markets have remained unaffected despite of worse than expected inflation numbers for June. Positive developments on the global landscape helped mask the disappointment, which helped equity and debt market performed well. Equity indices inched up, while bond yields were rather flat. Liquidity situation was comfortable too.

Greece has been successful in securing a third bailout package which has averted its exit from the Eurozone, although temporarily. Iran has signed a nuclear deal with six major powers of the world. As Iran may now rebuild up its export market; oil prices are expected to remain lower for relatively longer time. Lower crude oil prices significantly lower the pressure on India. Moreover, bearish sentiment on China's growth prospects affected the commodity prices negatively. This might help India to keep its import bill under control.

What to expect?

After above normal rainfall witnessed in June, the IMD has forecasted less than normal precipitation over the next two months (i.e. July and August) and advised the Ministry of Agriculture to keep ready a contingency plan, as the rainfall could be deficient by 8.0% and 9.0% in July and August respectively. Such a forecast spells bad news for the agrarian sector which has encountered the atrocities of unseasonal summer rains and hailstorms and inflicts risk to food inflation.

It is expected that food prices will stay higher this monsoon season as the new crops and the benefits of a good monsoon will only be felt in October. But to ensure adequate supply of food articles, the centre floated a tender for importing about 5,000 kgs each of Tur Dal and Urad Dal. It has also banned export of pulses (barring those of Kabuli Chana) and also inserted stock limits to prevent hoarding.

RBI would decide its next monetary policy stance, after assessing how monsoon fares and the Government's strategy to manage a rainfall deficiency (if any). Unless, inflation expectations come lower, RBI may not offer further rate cuts.

PersonalFN is of the view that you should not speculate on the movement of interest rates or any other macro-economic development. You should invest as per the asset allocation charted for you based on your risk profile and financial goals.

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