If the numbers are to be believed, India’s inflationary woes may have subsided, for the moment at least. The Wholesale Price Index (WPI) rose by 7.2% on a year-on-year (y-o-y) basis in December. On a month-on-month basis, too, this number appears to have cooled a bit. More significantly, the non-food manufactured component of WPI rose by just 4.2% y-o-y during the same month. This is its lowest reading since June. These numbers have renewed calls for a policy rate cut by the central bank.
This may, or may not, provide justification for a rate cut by the Reserve Bank of India (RBI); other bits and pieces of inflationary data muddy the picture somewhat. Consider inflation as measured by the Consumer Price Index (CPI). While WPI is cooling, CPI remains on fire: from April to December, CPI has grown either in double digits or close to double digits. In December, CPI rose by 10.6% y-o-y. Within CPI, the food, beverages and tobacco component grew by 13% y-o-y. In fact, this part of the index has remained in double digits through this period. And viewed sequentially, it has only increased. Within WPI, too, food articles rose by 11.2% in December. Since June, this part of WPI has remained close to double digits.
One explanation for this divergence between CPI and WPI—340 basis points in December—is food articles. The conclusion drawn from this fact is it should not influence the central bank’s decision on a rate cut as it can do little about food inflation. Currently, core inflation—RBI’s domain of firefighting—is close to its “zone of comfort”. Hence all the noise about a rate cut. This will be erroneous. It is true that RBI can do little to influence food inflation—and the government has done little or nothing to cool these prices—but some caution is in order here. The danger, especially at elevated levels, of food inflation spilling into core inflation through a wage push effect is very real now. The demands for higher wages by workers in various industrial belts is now more than just anecdotal. Given the wage level of these workers, it is hard not to believe that food price inflation does not have something to do with such demands. The dilemma is not whether to cut the policy rate or not but on dealing with the divergence between retail and wholesale prices.
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