Will retail inflation come below 6%?

This is perhaps the most important question confronting policymakers. Retail inflation, as measured by the Consumer Price Index has been above 6%, the upper limit of RBI’S tolerance level in May and June. Prices of fuel and edible oil have been the major drivers of inflation so far. While prices of petrol and diesel have not increased since July 17 and July 15, they have not come down either. As of now it also appears that the deal among Organisation of Petroleum Exporting Countries (OPEC) to gradually increase crude oil production has not had a major effect on prices. The price of India’s crude oil basket, as per data from the ministry of petroleum, was $74.2 per barrel on July 29.

“Commodities as a whole have risen more than 20% this year, and around 50% in the case of crude oil. The Bloomberg Commodity Spot Index is at a decade high and heading for its fourth-straight monthly increase. Big Oil companies and miners, awash with cash, are returning billions of dollars to shareholders through dividends and buybacks. Few analysts expect the gains to reverse soon and many think they’ve got further to run”, a Bloomberg story published on July 30 said. To be sure, even core-inflation, the non-food non-fuel component of the CPI basket has been high in India, which makes inflation a broad-based problem at the moment.

While officials at both RBI and government continue to maintain a brave face on inflation, terming it as a transient problem, if the headline number does not come down, pressure will increase towards rolling back the accommodative stance of monetary policy in the near future.