Home / Opinion / Views /  Will the RBI follow US Fed Chair Powell or FM Sitharaman?

Every cloud has a silver lining, goes the old saying. Not so, it would seem, when the cloud on the horizon is inflation. Monday’s data on retail inflation for August in India (7%) and Tuesday’s data on inflation in the US for the same month (8.1%) confirmed what many have feared for a while now. Even as the debate has shifted from the erstwhile fixation with whether inflation was transient or permanent to the new issue of whether it is structural or cyclical, what is beyond dispute is that the battle against inflation is unlikely to be won quickly or easily.

Macro data is seldom unambiguous. Depending on how you slice and dice the data, you can usually find some silver lining in the cloud, however dark it might seem at first glance. Unfortunately, there is nothing redeeming about the latest inflation data. On the contrary. Even after discounting for base effects, it disappointed on many fronts. To start with, it was the eighth consecutive month in this calendar year when inflation came in over the upper end of the Reserve Bank of India’s (RBI) target band of 2-6%. It was higher than estimates (6.9%); it marked a reversal of the declining trend of the past three months; it was driven by sharply higher food inflation (7.7% as against the previous month’s 6.8%); core inflation was close to six percent and in, perhaps, the unkindest cut of all, rural inflation was higher (7.2%) than urban inflation (6.7%). Remember, our rural population is much higher than urban; also, income levels in the former are also much lower so higher rural inflation hurts many more Indians.

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Sure, high (and persistent) inflation is a global phenomenon, as evidenced by US inflation numbers that came in a day later than ours, and, again, higher than most estimates, despite a decline in gas costs. As in India, core inflation, i.e. inflation excluding food and fuel, also came in higher than expected (7.4%, annualised). Remember, India and US are not outliers. Today, there is hardly any major economy that is not grappling with high inflation. But that is small consolation for a country like India that has close to 200 million below the poverty line. Numbers may vary slightly depending on how one defines the poverty line but there’s no denying they are significant.

Sure, commodity prices have corrected. The average international price of crude oil is down 7.7% to $97.7 per bbl in August 2022 from $105.8 per bbl in July 2022, and this should help keep fuel inflation (presently 10.8%) under check. Except that higher US inflation and hence strong action (read, sharp increase in interest rates) by the US Federal Reserve is bound to strengthen the US dollar and in tandem weaken the rupee, raising the domestic cost of oil and all other imported items and, in turn, domestic inflation.  

These are the final inflation-related data points available before the meeting of the RBI’s Monetary Policy Committee (MPC) in end-September 2022 and the September meeting of the Fed’s FOMC (Federal Open Markets Committee) also a few days before our own MPC meet. Fed Chairman Jerome Powell has made his intentions clear. The Fed is in for the long haul; it will do ‘whatever it takes’ to get average inflation back to two per cent, regardless of the pain the Fed’s action might inflict on the US economy. Continued aggressive rate action is now almost on the cards. Most economists expect a third consecutive 75 basis points hike in the Fed rate, with some suggesting it could even be an unprecedented 100 basis points hike.

In contrast, the signals from the RBI have been mixed. From a purely monetarist angle, the case for another hike of 50 basis points is strong. But the RBI, unlike the US Fed, is also the government’s merchant banker with a mandate to ensure the government’s gargantuan appetite for debt is not only met but at the lowest possible cost. This constrains its ability to act on the price front, quite unlike other central banks. Adding to its dilemma is Finance Minister Nirmala Sitharaman ‘subtly’ signalling her preference for some soft-pedalling by the RBI on the rate front in a recent speech at ICRIER, a Delhi-based think-tank.

That, perhaps, explains why our Sensex seems to have brushed off our inflation numbers while the US S&P 500 dropped 4.3%—its biggest drop in more than two years—on news of US inflation numbers. Possibly the fact that WPI (Wholesale Price Inflation) came in a tad lower at 12.41% as against 13.93 in July 22, while remaining firmly in double digits for 18 months, gave markets a soupcon of comfort that the RBI will not go hammer and tongs against inflation unlike the Fed. But, as Fed Chair Jerome Powell said at Jackson Hole, "Without price stability, the economy does not work for anyone". So, will RBI take a leaf out of Powell’s book or heed the FM?

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