Rising Inflation

That may not be reason enough for lawmakers to pull up the RBI for an explanation, especially when growth is floundering. Photo: Aniruddha Chowdhury/Mint

• Prices of milk, pulses, cereals, edible oils, sugar, eggs, meat and fish are on the rise
• Rabi output may ease pressure from pulses and cereals but other items could still remain firm

Topics: Inflation

• If 7.35% wasn’t bad enough, here is 7.59%. Old foe inflation is back to haunt the Reserve Bank of India (RBI) but this time there isn’t much power in it. Also, the reasons are pretty much known and anticipated by the central bank.
• Vegetables are yet to get cheaper and therefore remain the biggest contributor behind the 7.59% headline consumer price index inflation for January. This is expected to change henceforth as prices have been coming down off late. “The January reading of headline CPI however, is likely to be its peak and going ahead headline inflation should ease, driven by the ongoing reversal in vegetable prices on higher production of major vegetables,” said Gaurav Kapur, chief economist at IndusInd Bank.
• But the story beyond vegetables should also give some bad moments to the RBI. Prices of milk, pulses, cereals, edible oils, sugar, eggs, meat and fish are on the rise. While rabi output could ease pressure from pulses and cereals, other items could still remain firm for some more time.
• Core inflation, that captures the demand in the economy and is a key input for monetary policy, has began its climb up again. Core inflation is now within a hair’s breadth from 4%. Much of the rise in core is attributed to the recent tariff hikes by telecom companies and price increases of a few drugs.
• But in an economy where capacity utilisation is near 70%, the upward pressure on core inflation is likely to abate, analysts argue.
• Given that food inflation is on the downward path and core inflation is little reason to power ahead, most expect the headline inflation to drop from here on. Kapur of IndusInd Bank expects inflation to ease to 6.8-7.0%. Economists at Nomura are penciling an average inflation of 6.5% in the current quarter and then moderate 4.6-4.7%.
• If Nomura is closer to what actually may happen, this means the central bank will have to face an inflation over its mandated target of 2-6% for three months at least.
• That may not be reason enough for lawmakers to pull up the RBI for an explanation, especially when growth is floundering. Calls for a rate cut are still doing the rounds in the market and Nomura expects a cut as early as April.
• It may look like the inflation has run far ahead of the central bank’s target. But, in this race of hare and tortoise, the RBI would prefer to be the latter and wait for inflation to ease.