New Delhi: India’s monthly headline inflation rose to a 15-month high of 8.56% in January on higher primary and manufactured food prices, breaching the 8.5% level the Reserve Bank of India (RBI) has forecast for March-end. Wholesale price inflation stood at 7.31% in December, while it was 4.95% in January 2009.
Combined with a robust recovery in factory output and gross domestic product, faster inflation will put additional pressure on the government and RBI to roll back some of the fiscal and monetary stimulus measures implemented to revive the economy during the global financial crisis.
Also See Increased Pressure (Graphics)
The trend may also inhibit the government from hiking fuel prices, a move that would stoke inflationary pressure. The government is currently debating the freeing up of fuel prices as recommended by the recent report of a committee.
In January, while prices of potatoes and pulses rose 53% and 46%, respectively, sugar went up 59% from a year ago. Deficient monsoon rainfall and drought conditions in several parts of the country have accentuated the pressure on food prices, pushing up the overall inflation rate.
In its macro-economic review in January, RBI said pressure on headline inflation from high food prices entails the risk of getting transmitted over time to other non-food items. The possibility of surges in capital inflows and the associated domestic liquidity conditions may affect inflationary expectations, besides the impact of the rebound in international commodity prices.
To boost supplies, the government on 13 January announced the import of refined sugar at zero duty till 31 December, selling of 2-3 million tonnes of wheat and rice in the open market over the next two months and asked state-owned trading firms to intensify the import of pulses.
RBI raised the cash reserve ratio, the amount of money that banks need to keep aside, in its January policy review by 75 basis points to suck out Rs36,000 crore of liquidity from the system. A basis point is one-hundredth of a percentage point.
RBI deputy governor Subir Gokarn told Mint on 8 February the withdrawal of the monetary stimulus will be gradual. “We do not want to be disruptive; we do not want to see the recovery being impeded in any way by financial constraints. At the same time, we do not want to see an overheating situation.”
“I do not expect RBI to act immediately,” said Indranil Pan, chief economist with Kotak Mahindra Bank. “Any action from RBI is only expected in its April policy review. It may hike both repo and reverse repo by 25-50 basis points.” The repo rate is that at which RBI gives money to banks, the reverse repo rate is that at which it sucks out liquidity from the system.
Graphics by Yogesh Kumar/Mint