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Journalism of Courage
The world over, countries are grappling with the issue of high prices. From developed economies such as the United States and the United Kingdom to developing countries such as Indonesia and Brazil, inflation has emerged as one of the main causes of concern for policymakers. India is no different. Inflation in India was high before the pandemic and has remained so since then.
So what do the latest data show?
Government data released a few days ago showed that inflation had fallen to a three-month low of 6.77 per cent in October. Prior to that, inflation stood at 7.04 per cent in the second quarter (July-September), down from 7.28 per cent in the first quarter (April-June).
While this trend would suggest that perhaps inflation has peaked, it needs to be pointed out that this is the 10th straight month that inflation has remained above the upper threshold of the Reserve Bank of India’s (RBI’s) inflation targeting framework. The RBI is mandated to keep inflation at 4 per cent (plus/minus 2 per cent).
Part of the decline in October can be attributed to a fall in food inflation. The consumer food price index fell to 7.01 per cent in October, down from 8.6 per cent in September.
However, both food and fuel prices tend to be extremely volatile in nature. Their wide fluctuations can lead to huge volatility in the overall inflation readings. So analysts tend also to look more closely at core inflation which is essentially a measure of inflation that excludes food and fuel.
The latest data show that core inflation remains uncomfortably high. As per ICRA’s estimate, core inflation stood at 6.5 per cent in October. This is the fifth straight month that core inflation has remained above the 6 per cent mark.
As per Nomura, “firms continued to pass on higher input costs to consumers, and the services sector reopening added to price pressures.”
This indicates that even though the headline inflation number has come down, price pressures continue to remain in the economy.
In the last monetary policy committee (MPC) meeting, the RBI had projected inflation at 6.5 per cent during October-December. Thereafter, it expects inflation to dip to 5.8 per cent in the fourth quarter (January-March) and then further to 5.0 per cent in the first quarter (April-June) of the next financial year (2023-24).
However, others differ in their assessments. For instance, as reported in this paper, government officials feel that ending the financial year (March 2023) with inflation at 6.5 per cent is a “reasonable expectation”.
On the other hand, analysts from Nomura expect inflation at 6.6 per cent in October-December, falling marginally thereafter to 6.3 per cent in January-March.
These inflation projections matter as they determine how policymakers will respond.
So far, to tackle high inflation, the monetary policy committee of the RBI has raised the interest rate from 4 per cent to 5.9 per cent. This has translated to higher interest rates on loans for both individuals as well as corporates.
Now, as inflation continues to remain above the upper threshold of the inflation targeting framework, some analysts expect the RBI to continue to raise interest rates to fight inflation.
However, there are others who believe that as it takes time for the interest rate hikes to impact inflation, and considering that inflation has possibly peaked, it would be wise to pause at this juncture and wait to see the trajectory of inflation for some time.
This debate is also taking place within the MPC. Jayanth Varma, who is a member of the MPC, has stated his preference for not hiking rates beyond 6 per cent. But others in the committee seem more inclined to raise interest rates further.
Which view will gain the upper hand and whether or not interest rates will be hiked further will only be known when the committee meets next in the first week of December.
