Tuesday May 17 2022

India's WPI inflation at 17-year high threatens small businesses

A farmer stands in his wheat field, which was damaged by unseasonal rains, at Vaidi village in the northern Indian state of Uttar Pradesh, March 25, 2015. — Reuters
A farmer stands in his wheat field, which was damaged by unseasonal rains, at Vaidi village in the northern Indian state of Uttar Pradesh, March 25, 2015. — Reuters

  • Spike in fuel, food prices push WPI inflation to 15.08% y/y.
  • April WPI fuel inflation up 38.66% y/y vs 34.52% in March.
  • Economists see central bank raising key policy rate in June.

NEW DELHI: India's wholesale prices accelerated at the fastest pace in at least 17 years as the Ukraine war and a weak rupee pushed up energy and raw material costs, raising risks for businesses that are unable to pass on costs.

While big retailers, food makers and consumer product companies including Hindustan Unilever, Britania, and Procter & Gamble are passing along higher costs to consumers, small companies are finding it hard to raise prices, industry leaders said.

Annual wholesale price inflation (INWPI=ECI), a proxy for producers' prices, climbed to 15.08% in April, remaining in double-digits for the 13th month in a row, and higher than 14.48% forecast in a Reuters poll of analysts.

Wholesale prices are at the highest since at least April 2005, according to Refinitiv data. Some private economists said WPI inflation in April was the highest since 1991, according to an earlier series.

Economists said that with wholesale inflation picking up along with retail inflation at 7.79% in April - an eight-year high - the central bank was likely to push for aggressive rate hikes to tame prices. Higher rates will pose a drag on economic growth as well, they said.

"With WPI inflation remaining solidly in double-digits, the probability of a repo hike in the June 2022 review of monetary policy has risen further," said Aditi Nayar, chief economist at ICRA, the Indian arm of rating agency Moody's.

She expects a 40-basis-point hike in the repo rate in June followed by a 35-basis-point hike in August.

Reuters Graphics
Reuters Graphics

Russia's invasion of Ukraine in February has supercharged already rising commodity and fuel prices and kept global policymakers busy trying to contain red-hot inflationary pressures.

Risk of slowdown

Private economists worry that rising prices that prompted the Monetary Policy Committee of the Reserve Bank of India to raise the repo rate by 40 basis points this month and warn of further rate hikes, will hit demand and investments.

Nomura expects India's 2022 GDP growth could slow to 6.8% from 8.3% the previous year as broad-based inflationary pressures weigh on demand amid tightening monetary conditions.

Fuel prices, a big component of the increase, jumped 38.66% on year versus 34.52% in March. A more than 4% rupee depreciation against the dollar this year has also made imported items costlier.

Wholesale manufactured product prices rose 10.85%, against 10.71% in the prior month, while food prices accelerated at an 8.88% pace, versus 8.71% previously, data showed.

With the rise in fuel prices and metals such as steel, copper and other materials, many small businesses are facing a risk to their survival, said K E Raghunathan, convenor of Consortium of Indian Associations, representing nearly half a million businesses.

"We fear the worst is yet to come ... and the situation warrants war-like attention," he said, adding that around 15 million jobs are at risk.