Inflation no longer a transitory risk
The Monetary Policy Committee (MPC) of the Reserve Bank of India, which is meeting again from Monday to Wednesday to decide on future action, can no longer keep assuming that inflation is a transitory risk. Globally, central banks are fast realising this as inflation keeps creeping up. The average global inflation (as per IMF) in 2021 has increased 110 basis points (bps) to 4.3%, while the same for emerging and developing markets has touched 5.5% during the year. In India, while the inflation has moderated from 6.2% in 2020 to 5.6% in 2021, it is perilously close to the upper limit of the RBI’s tolerance level of 6%.
High commodity prices have resulted in manufacturers across the board passing on the price pressure to end consumers. Auto manufacturers have already increased prices two-three times in 2021 and are getting ready for their annual hike in January next year. Maruti Suzuki, the largest car maker in the country, has announced that it is going to hike prices in January. Others will follow suit. Most FMCG companies have already increased prices in November by up to 20% across product categories. Paint companies have also effected price hikes after their second quarter results showed margin pressures. A recent CRISIL Ratings report predicts that input cost will push cement prices to an all-time high of `400 a bag. With vegetable prices surging again in November, thanks to untimely rains, inflation numbers of the month won’t look as benign as in October (4.48%). And while the inflation was attributed to supply bottlenecks so far, with growth momentum picking up (as is witnessed by the second quarter GDP growth rate of 8.4%), the demand side pressure would increase.
It is, therefore, unlikely that the RBI may be able to hold the rates at these levels for long, at the risk of stoking the inflation further. It will probably have to act sooner than later and address the elephant in the room.