Photo: Mint
Photo: Mint

Opinion | Conflicting signals

Since food prices, particularly of vegetables and onions, have been on the rise lately, consumer inflation has surged

India’s latest inflation figures might have just given the central bank another complexity to grapple with. The wholesale prices data released on Thursday showed October inflation edging lower to 0.16%. This is in contrast to retail inflation announced on Wednesday, which showed the headline figure going above the Reserve Bank of India’s (RBI) 4% median goal for the first time in more than a year.

Admittedly, the divergence can be traced to differing compositions of the goods and services baskets of the two metrics; the wholesale price index has its biggest weightage assigned to manufactured goods, while the consumer price index emphasizes food and services. Since food prices, particularly of vegetables and onions, have been on the rise lately, consumer inflation has surged. In contrast, relatively benign manufacturing as well as oil prices are pulling wholesale inflation down.

For India’s monetary policy, this creates some confusion. With consumer inflation breaching the 4% target by a modest margin (with the possibility of a further rise), RBI might turn cautious about cutting its policy rate beyond the single cut widely anticipated in December. Yet, wholesale inflation nearing deflationary territory sends out a grim signal of the state of our economy. The pricing power of manufacturers appears to have fallen, a result of a demand slump. The distress would likely be reinforced in the July-September gross domestic product (GDP) data later this month. Many analysts expect India’s GDP growth to dip below 5%. In such a scenario, a pause in rate cuts after December may not be wise.

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