Inflation falls to 5-yr low but RBI may hold rateshttps://indianexpress.com/article/india/india-others/inflation-falls-to-5-yr-low-but-rbi-may-hold-rates/

Inflation falls to 5-yr low but RBI may hold rates

From 5.19% in July, inflation down to 3.74% in Aug; lowest since Oct 2009.

No point in cutting rates to see inflation pick up again: Rajan
No point in cutting rates to see inflation pick up again: Rajan

Headline inflation softened to an almost five-year low of 3.74 per cent in August, but the Reserve Bank of India (RBI) may prefer to wait for a couple of more months and not cut interest rates when it reviews the monetary policy on September 30. The wholesale price index (WPI)-based inflation is the lowest since October 2009, when it stood at 1.8 per cent.

India has always been comfortable when WPI-based inflation is at 4 per cent or less. The August print of 3.74 per cent is partly attributed to a statistical base effect and sub-$100 global crude oil prices. Headline inflation in July stood significantly higher at 5.19 per cent, and the RBI kept the repo rate unchanged at 8 per cent in its August policy review.

While the government released the WPI data at 12 noon, RBI Governor Raghuram Rajan said at a banking summit earlier in the day that inflation remained high, both in food and non-food items. Economists said the lower inflation would not have a bearing on RBI’s review a fortnight later. The central bank is keen that prices do not rise again due to a pick up in the growth momentum.

Friday’s WPI data showed that food prices, including that of vegetables, wheat, rice and cereals, declined in August. Food articles inflation moderated to 5.15 per cent, compared to 8.43 per cent in July. Vegetables became cheaper by 4.88 per cent, with onion prices declining as much as 44.80 per cent during the month. The inflation in fuel and power category stood at 4.54 per cent, down from 7.40 per cent in July.

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Rajan, who did not have the headline inflation data with him when he spoke to bankers, said, “The best solution for the country is to bring it (inflation) down. Then I can cut interest rates… I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when it is feasible and that would be when we have won the fight against inflation… There is no point in cutting interest rates to see inflation pick up again.”

Consumer Price Index inflation, an equally if not more important economic data the RBI takes into account while deciding on its policy, also moderated a bit to 7.8 per cent in August, compared to 7.96 per cent in July. But it is yet to reach the comfortable 6 per cent target that RBI wants to achieve by January 2016.Enthused by the decline in inflation, the industry was quick to demand a rate cut. “Going forward, the strengthening of monsoon in September, recent policy measures to lower inflation and a drop in global food prices to a four-year low should further help contain food prices… Coming shortly before the monetary policy, this should also provide the necessary manoeuvring space to the RBI,” Chandrajit Banerjee, director general, Confederation of Indian Industry, said.

But economists do not expect Rajan to relent in his fight against inflation for now. Abheek Barua, consultant, ICRIER, said the RBI would hold the rates as its target is consumer price index, which is still very high. “Food inflation, especially vegetable prices, will certainly moderate going forward. However, I don’t think it is time for the RBI to cut rates. It is also possible that Fed hikes rates. The markets will remain jittery due to this and in such a situation, the currency will be hurt badly. He (Rajan) has an eye on the exchange rate too though he has not mentioned it explicitly. So this will be another reason for the RBI to hold rates for now,” said Barua.