RBI monetary policy committee’s first real inflation challenge is here
2 min read.Updated: 14 Jan 2020, 12:20 AM ISTAparna Iyer
Headline inflation surged in December, topping flexible target of 2-6% given to RBI’s monetary panel
Vegetables and pulses drove surge in headline inflation as the govt faltered on food management
India’s central bank has seen nasty double-digit inflation in the past, but its monetary policy committee (MPC) hasn’t.
Formed just a little over three years ago, MPC will have its first real challenge in keeping retail inflation within the lawfully-agreed flexible target of 2-6%, considering that inflation has breached this target to reach 7.35% in December.
The latest number has surpassed everyone’s expectations, even though a large swath of economists had anticipated a nasty number above the policy target.
Indeed, even the Reserve Bank of India (RBI) had indicated in its December policy that it expects inflation to briefly exceed the 4% target it wants to guard at all costs. The central bank’s forecast is that inflation will be 4.7-5.1% during October-March.
Following the December inflation data, economists are beginning to worry that inflation may stay above the target for a long period. There are multiple reasons for this.
The main culprit for an inflation surge was food. Within food, vegetables drove up prices sharply, and pulses too hardened considerably. “In particular, prices of pulses may remain elevated in the coming months, despite the favourable outlook for the rabi crop. Stickiness in prices of protein items may provide a floor to food inflation, going forward, even after vegetable prices correct to seasonally-appropriate levels," said Aditi Nayar, chief economist at Icra Ltd, in an emailed note.
While onions and garlic prices may cool off, prices of pulses depend not just on the rabi output, but also on how deftly the government manages its food stocks.
The fact that the government took time to import onions shows it has been slipping on its food management off late.
“We could have easily avoided the 14% food inflation if the government had been as proactive as it had been in the past on onion prices," said an economist, requesting anonymity.
Even as food plays spoilsport, telecom tariff hikes, cement price increases and, of course, the fired-up global crude oil prices will keep up the pressure.
Meanwhile, even as New Delhi faltered in managing food inflation, RBI has been left with fighting a slowing economy with rising inflation.
MPC will have to protect its 4% inflation target, but the cost of doing so could be high. A breach of inflation target necessitates a policy rate hike, but in the current context—of the slowest economic growth in six years—this will be dangerous. Instead, economists expect a long-drawn pause. “We are not looking at a rate cut until the second half of 2020," said Shubhada Rao, chief economist, Yes Bank Ltd.
MPC will have to watch onions, garlic and potato prices, besides hoping that past policy rate cuts will somehow reignite the dying embers of investment.