Re­tail in­fla­tion inches up, but in line with RBI pro­jec­tion

The New Indian Express - - FRONT PAGE -

IT’s a sigh of re­lief for In­dia’s mon­e­tary pol­i­cy­mak­ers. Lat­est data sug­gest head­line in­fla­tion con­tin­ues to be an obe­di­ent child, as it ought to be.

Septem­ber re­tail in­fla­tion inched up only a notch higher than Au­gust at 3.8 per cent, and 20 bps be­low the RBI’s 4 per cent medium-term target for the sec­ond straight month, per­haps jus­ti­fy­ing RBI Gover­nor Ur­jit Pa­tel’s de­ci­sion not to hike pol­icy rates last week.

Food in­fla­tion eased, and is likely to stay course con­sid­er­ing bet­ter agri­cul­tural pro­duc­tion, and chances of up­side risks through MSP are un­likely to play out as prices of fruits and veg­eta­bles are head­ing south. So, pol­icy rates could stay still even in De­cem­ber, ac­cord­ing to Crisil.

Even if food prices spike, RBI is un­likely to de­velop cold feet. Food and fuel ac­count for 57 per cent of the CPI bas­ket but they don’t have a di­rect in­flu­ence on mon­e­tary pol­icy.

Core in­fla­tion that ex­cludes fuel, food and elec­tric­ity prices, re­mained sticky at 5.8 per cent. Still, FY19 head­line in­fla­tion may re­main be­low 4.5 per cent, de­spite up­side risks from oil prices and weak­en­ing ru­pee, says B Prasanna, group ex­ec­u­tive and head of global mar­kets group, ICICI Bank.

RBI ex­pects in­fla­tion in the range of 3.9-4.5 per cent be­tween Oc­to­ber 2018 and March 2019, down from 4.8 per cent pro­jected ear­lier.

The change in pol­icy stance from ‘neu­tral’ to ‘cal­i­brated tight­en­ing’ in­di­cates rate hikes are round the cor­ner. That said, low food in­fla­tion pro­vides com­fort, but surg­ing oil prices, weak­en­ing ru­pee, and volatile fi­nan­cial mar­kets could top­ple that be­lief.

If rate hikes aren’t com­ing, it will force the govern­ment to curb spend­ing and re­sort to tax cuts (to rein in ris­ing crude prices) but that will up­set the fis­cal deficit ap­ple­cart.

De­spite a clear target, suit­able in­stru­ments and in­su­la­tion from out­side pres­sure, the MPC can­not pos­si­bly fore­see all con­tin­gen­cies. The RBI’s de­ci­sion de­pends on judg­ment and, there­fore, some dis­cre­tion.

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