The optimism about moderation in consumer inflation, fuelled by the decline in CPI inflation in July to 6.7 per cent, has been doused by a higher-than-expected reading of 7 per cent for August. The turnabout signals that policymakers cannot afford to relax the vigil on price control just yet. The increase in August was led by food inflation, which shot up to 7.6 per cent in August from 6.7 per cent in July. Higher prices of cereals and pulses due to lower acreage in the kharif sowing season and vegetables, spices, milk and sugar have been driving food inflation, with animal proteins, which witnessed a sharp decline, being the outlier. The other area of concern is the core CPI inflation (excluding food and fuel) remaining elevated at 5.9 per cent. With demand for services increasing with the reopening of the economy and producers gradually passing the increase in input costs to consumers, price increases are becoming broad-based. Inflation in personal care and effects increased 100 basis points since July, with spikes in education and household goods and services inflation as well. The silver lining was CPI for fuel and lighting cooling slightly from 11.8 per cent in July to 10.8 per cent as global crude oil prices declined.

While inflation may not increase too much from current levels, it is likely to remain elevated, and above the Reserve Bank of India’s comfort zone in the coming months. There could be relief in food inflation due to policy measures such as ban on export of certain varieties of cereals including wheat and rice, rationalisation of import duties and imposition of stockholding limits on agri products. Prices of cereals and pulses have cooled slightly in recent weeks while edible oil prices are down quite sharply over the past few months. Inflation in fuel and lighting is also unlikely to spike too much in the coming months since pressure on global crude oil prices are evenly balanced. Crude prices will be contained by easing of demand due to growth slowdown in Europe, the US and China and higher supply once the nuclear deal with Iran is finalised, but higher winter demand and production cuts from OPEC will support prices. Core inflation is however likely to be sticky due to private consumption reviving with reopening of the economy and producers continuing to hike prices gradually. A weak external environment has been weakening the rupee, thus increasing imported inflation.

The problem has been compounded for RBI by the growth impulse coming under pressure in recent weeks. The RBI needs to carefully calibrate its monetary policy and not follow the US Fed in sacrificing growth in order to contain inflation. Inflation in the US is primarily demand-driven and is at a multi-decade high. Given that the price rise in India is largely due to factors on the supply side, the RBI can afford to adopt a less aggressive stance and calibrate policy rates such that the nascent revival in consumption is not derailed. The turnaround in foreign portfolio flows into equity as well as debt in August offers some leeway to the central bank in monetary tightening. Both the Centre and the RBI will have to join hands and work in tandem to control prices without destabilising growth.

social-fb COMMENT NOW