Retail inflation is demanding attention, breaching past the RBI's upper tolerance band as it did in October for the first time in the past one year.
With volatile food prices repeatedly turning up like a bad penny, hopes of an interest rate cut has collapsed in a heap, though the government and the industry perhaps want the central bank to give it the gun.
If Finance Minister Nirmala Sitharaman asked banks to make borrowing affordable as the current cost of borrowing was 'very stressful,' Union Commerce Minister Piyush Goyal urged RBI to consider reducing rates, while calling the practice of basing rate decisions on food prices a 'flawed theory.'
Inflation is indeed going up and down and behaving more like a magician, who tricks you again and again.
Until last month, headline inflation seemed to be on a path of durable decline, prompting RBI Governor Shaktikanta Das to announce in August that the elephant was back in the forest. His confidence was short-lived and he was back to his usual position as a captain of caution in October, stressing that the inflation horse was back in the stable, but the central bank needs to be 'very careful about opening the gate, as the inflation horse may bolt again.'
It's now confirmed that the horse did bolt, with headline inflation printing at a 14-month high of 6.21% in October. It further reminds us that all economic forecasting is nothing but an imprecise science.
The main culprit is food inflation, which jumped to 10.87%, largely led by vegetable prices that rose by a staggering 42.18% in October. As per RBI's State of the Economy report, tomato and potato prices alone were up 161.27% and 51.84% y-o-y, respectively.
With October's 6.21%, the next two readings should print less than 4.5% each, though that's entirely a matter of chance. In Q2, inflation settled at 4.2% as against RBI's estimate of 4.1%, while for Q3 and Q4, the central bank pegged headline inflation at 4.8% and 4.2%, respectively.
While analysts believe the spike was sharper than expectations, RBI did anticipate an unpleasant inflation number, which is why Das was unwilling to change horses (rate pivot) midstream. As recently as last week, he reiterated that a rate cut would be 'premature and very, very risky,' given the prevailing uncertainties.
The good news is, ample buffer stocks of cereals, a likely good crop in the ensuing rabi season, bolstered by comfortable reservoir levels, and the arrival of fresh harvest will likely mitigate the sequential rise in prices to an extent.
As Deputy governor Michael Patra noted, inflation will likely encounter a hump in the near months largely due to an adverse base and one-off shocks to prices of vegetables, edible oils and gram. However, these shocks should dissipate by December as supply conditions improve, until which time monetary policy will look through.
The fact that inflation is indeed transitory and a short-term threat can be further confirmed looking at RBI's changed policy stance from hawkish to neutral last month. "The balance between inflation and growth is well-poised. India's growth story remains intact," Das stressed during the October policy review.
But what's undeniable is that price rise affects consumption, which is barely growing, and at a time when high frequency data is sending mixed signals as it is. While goods and services tax, e-way bills, toll collections, air passenger traffic, steel, cement and auto industries output is doing well, IIP numbers and FMCG sales in the urban sector have considerably moderated. Moreover, disappointing corporate results, slower revenue growth across multiple industries, indicate the slowdown in both urban and rural demand.
Besides, unexpected weather events, worsening of geopolitical conflicts constitute major upside risks to inflation, while the global commodity markets and supply chains warrant continued vigilance. Considering all these, brokerages have dismissed chances of a rate cut even in February policy and the anticipated cumulative 50-75 bps easing is now expected to take longer than initial expectations.
Citing a likely drag on growth, the October policy saw one dissenting member demanding an immediate 25 bps rate cut. When the six-member Monetary Policy Committee meets next from December 4-6, it will confront contradictory signals form both global and domestic economies. The upcoming December policy review will be the last for Das during his second stint, though a Reuters report has indicated that he was likely to get a one-year extension. Regardless, Das and his team will keep their eyes skinned for a firmer signal that would tell them when to take off.
