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Residents have also urged the state government to intervene by reducing VAT on petroleum products in the state. (HT FILE) (HT_PRINT)
Residents have also urged the state government to intervene by reducing VAT on petroleum products in the state. (HT FILE) (HT_PRINT)

Fuel is on fire, but RBI’s rate setting panel was on a worry path already

  • Fuel prices affect most segments of the economy; and may even push food inflation
  • Surge in core inflation indicates it would be a challenge for RBI to achieve its price stability goal

India’s central bank seemed less worried on inflation earlier this month when it signalled its intent to continue with an accommodative policy stance. But minutes of the meeting of its rate-setting committee show that members are already on the worry path over inflation.

Representatives of the Reserve Bank of India (RBI) flagged the stickiness in core inflation at the meeting and governor Shaktikanta Das has put the blame rightly on indirect taxes.

“Proactive supply side measures, particularly in enabling a calibrated unwinding of high indirect taxes on petrol and diesel—in a coordinated manner by the Centre and states—are critical to contain further build-up of cost pressures in the economy," said Das, according to the minutes of the monetary policy committee (MPC) meeting.

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Fired up

Indeed, fuel prices permeate most segments of the economy and could even push food inflation at the consumer end.

The recent surge in petrol and diesel prices has triggered dismay and ire.

Analysts have pointed out that the jump in prices is predominantly due to an increase in taxes rather than international oil prices.

That said, the rise in crude oil globally too would add to the pain. Fuel inflation was 3.87% in January, a sharp jump from 1.62% in November.

Besides fuel, deputy governor Michael Patra flagged concerns over core inflation. Core inflation has remained sticky above 5% despite headline retail inflation falling closer to the central bank’s comfort level.

Ironically, the RBI’s comfort on inflation comes from a sharp fall in food prices over which the central bank has no control whatsoever.

Monetary policy deals with demand-push inflation and therefore the surge in core inflation indicates that the RBI would find it challenging to achieve its price stability objective. Members also pointed out that households expect double-digit inflation one-year ahead and this reflects the uncertainty that the RBI faces.

Another form of inflation that the central bank faces is asset price inflation. Patra warned that the recent highs touched by equity indices seem to be driven by irrational exuberance as also by the gush of liquidity globally. The risks to financial stability from this are palpable, according to the deputy governor.

That said, the MPC members felt that the need to support the growth recovery overshadowed concerns over inflation as of now.

Ashima Goyal believed that the slack in the economy is still high with output gap remaining wide. This warrants for continued monetary support from the Reserve Bank of India. She finds support in Das and even other members such as Patra and Shashanka Bhide.

To be sure, the biggest risk to economic recovery that the policy highlighted was a second wave of covid-19 infections and likely lockdowns. Given the rise in cases in recent weeks, this risk now looks imminent.

Select districts have gone into lockdown albeit milder than before and rising cases in large cities have begun to worry respective state governments. Ergo, the RBI is justified in keeping up with its support to growth recovery despite incipient signs of inflation flare-ups.

The minutes of the meeting clearly show that the monetary policy committee is still focused on growth. But the spectre of inflation has become more pronounced now and it is only a matter of time that the fuel to the inflation fire would singe.

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