Opinion | An inflation uptick RBI can ignore1 min read . Updated: 15 Oct 2019, 02:09 PM IST
- The consumer price index rose 3.99% from a year earlier in September, more than the 3.28% increase reported in August
India’s annual inflation rate comes as a slight surprise. The consumer price index, which is the price rise indicator most closely followed by the Reserve Bank of India (RBI), increased 3.99% from a year earlier in September, significantly more than the 3.28% increase reported in August. September’s reading is the highest in 14 months and almost matches RBI’s 4% long-term target.
Now that the central bank’s target has been nearly met, will it rethink its easy-money policy stance? More importantly, does the price escalation point to a rebound in consumer demand? The answer to both is no. That’s because much of the increase is due to a rise in the prices of vegetables and pulses, likely caused by seasonal supply-side shortages. These should get corrected once the recent steps taken by the government to enhance domestic supplies begin to show results. Once this happens, headline inflation should drop below the central bank’s target level again. As for demand, core inflation—widely considered its proxy—remains rather low, implying that the overall demand scenario hasn’t changed.
For monetary policy, this means the money loosening cycle hasn’t yet ended. RBI has already cut its repo rate, which is the rate at which it lends overnight funds to banks, five times this year. A sixth cut is still on the cards, particularly after Friday’s industrial production data showed an output contraction in August. To be sure, the problem of weak monetary transmission hasn’t yet been fully addressed. This could yet prompt RBI to pause its easing until banks pass on some of its past rate reductions to their customers. Nevertheless, its accommodative stance should not change. The cost of capital needs to fall further.