In­di­ans don't feel ben­e­fits of RBI fight against in­fla­tion

The Pak Banker - - COMPANIES/BOSS -

In­dia's cen­tral bank gover­nor Raghu­ram Ra­jan may have re­shaped mon­e­tary pol­icy and brought down con­sumer in­fla­tion to the low­est in years, but con­vinc­ing peo­ple like house­wife Shaila Pai that prices are un­der con­trol is prov­ing a tough chal­lenge.

En­trenched ex­pec­ta­tions of high in­fla­tion in In­dia are feed­ing into higher wages and other prices, which could tie Ra­jan's hands even as he faces grow­ing pres­sure to cut in­ter­est rates for a fourth time this year to help a patchy econ­omy.

Pai, a mother of two in Mum­bai, says she has yet to feel any ben­e­fit from off­i­cal data show­ing in­fla­tion is eas­ing. Her liv­ing costs are as high as they have ever been and the fam­ily is cut­ting down on travel, eat­ing out and per­sonal spend­ing.

"The big­gest part of our house­hold ex­penses goes to­wards ed­u­ca­tion, food and medicines, and all of them are very ex­pen­sive. We can't cut corners much there," she said.

"I ex­pect hos­pi­tal, food, ed­u­ca­tion costs will con­tinue to rise in the dou­ble dig­its."

She is not alone. A sur­vey by the Re­serve Bank of In­dia (RBI) this week showed house­holds ex­pect con­sumer in­fla­tion to hit 10.1 per­cent within three months, al­most dou­ble the cur­rent 5.4 per­cent and a level not seen since late 2013.

At its latest pol­icy re­view on Tues­day, the cen­tral bank kept rates steady but held out the prospect of another eas­ing af­ter cut­ting the pol­icy rate by three-quar­ters of a per­cent­age point so far this year.

"Price pres­sures are build­ing up and these are sticky," said a se­nior pol­i­cy­maker fa­mil­iar with the RBI's think­ing. "We are cau­tious. We have to see whether core in­fla­tion will feed into head­line num­bers or not."

Since be­com­ing gover­nor in Septem­ber 2013, Ra­jan has re­fo­cused pol­icy on con­sumer in­fla­tion in­stead of whole­sale prices. Ear­lier this year, the gov­ern­ment and RBI agreed on adopt­ing a tar­get to keep in­fla­tion be­tween 2 to 6 per­cent.

While that looks on track for now, core in­fla­tion, which ex­cludes volatile fuel and food prices, has risen for the past six months, and reached around 5 per­cent in June.

A 16.2 per­cent surge in ur­ban wages in the Jan­uary-March quar­ter, the big­gest in­crease in 11 quar­ters, is a key driver of core in­fla­tion.

"In ev­ery­body's mind, in­fla­tion is hov­er­ing at 8 per­cent," said Anan­dorup Ghose, a part­ner and head of re­wards at Aon He­witt, a global hu­man re­source so­lu­tions com­pany.

"For com­pa­nies to give salary in­creases less than 10-10.5 per­cent, it al­most seems like you are not giv­ing a real pay in­crease com­pared to in­fla­tion." Other costs are also start­ing to rise, ac­cord­ing to the RBI.

Among the big­gest in­creases have been in ed­u­ca­tion, an ex­pense few mid­dle-class house­holds in In­dia are will­ing to cut. Ed­u­ca­tion costs rose 7.23 per­cent in June, the big­gest jump among the sub-sec­tors in the core CPI data, fol­lowed by cloth­ing and then house­hold goods and ser­vices.

Ra­jan on Tues­day in­di­cated the cen­tral bank would closely study the pace of in­fla­tion ex­pec­ta­tions and the way it im­pacts con­sumer be­hav­iour. "If we re­ally want to man­age in­fla­tion, we have to look at the sum to­tal of in­fla­tion, es­pe­cially the in­fla­tion that con­fronts con­sumers be­cause that is what de­ter­mines things like house­hold sav­ings be­hav­iour. It also de­ter­mines the wage pres­sures that will come," he told re­porters.

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