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CPI inflation still remains a concern

Thursday, 3 April 2014 - 9:30am IST | Agency: dna

The bi-monthly monetary policy statement of the Reserve Bank of India (RBI) on Tuesday did not spring up any surprises on the rate front but has left many bankers with concerns about the months to come.

The RBI left key repo rate unchanged at 8% and the governor, Raghuram Rajan, just spoke about the present situation with `guarded statements'.

For the common person, this means loan rates would not increase for the moment but that does not imply they won't rise. However, banks have been told not to levy penal charges for non-maintenance of minimum balance in ordinary savings bank account and inoperative accounts and this could be some respite for the middle class burdened with high food costs.

Rajan, however, has indirectly flagged off concerns on real GDP growth being 5-6% but downside risks were more from government's estimate of 5.5%. This means the growth rate is certainly not encouraging till the new government comes to power and announces their budget, which should be around June.

It is obvious future rates would largely depend upon CPI, currently at 8.1%, which, in turn, is dominated by food supplies. Given the close to 50% weightage on food in CPI, unseasonal rains and the possibility of El Nino effect in south Asia imply food production is more than likely to be lower. This, in turn, would spurt CPI hence the 8% envisaged by the Urjit Patel's recommendations by January 2015 now looks distant.

For the months to come CPI, on account of food inflation, could be higher. The RBI has already said vegetable prices were unlikely to soften further. On the other hand, protein-rich food, milk, eggs, poultry, etc have already risen 6-10% in recent months.

Trends in core inflation (wholesale price index) and CPI have been divergent in February with one showing an upward bias and the other, downward. Core WPI rose to 3.15% in February as against the previous month's 3.02% while CPI trended lower eased marginally to 8.1% from 8.8%. There are areas where RBI has little role to play and the government has more. These are fiscal deficit, core inflation comprising of oil and non-food inflation and bottlenecks on the supply side all of which need government will. Fiscal deficit that has surpassed the estimated Rs 5.25 lakh crore by 14.01% to Rs 5.99 lakh crore is more than likely to be revised upward again.

This again boils down to the general polls and the new government formed after May 16. Overall, the sentiment in the markets remain positive with a likelihood of a stable government and continuance of economic reforms. But the year is laced with rising inflation.

The new government will, hence, have a major task of greasing the jammed wheels of the economy by addressing the slowdown in investments, announcing the minimum support prices for agricultural commodities and taking into account the global commodity prices.

Even if the polices are growth-oriented, it could take a good 2-3 quarters for the fruits to bear.

Under the circumstances, of external factors too, the RBI will have no other choice but to curb demand by hiking rates.

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