Opinion Express View on inflation: A matter of interest

AAZData released by the National Statistical Office on Friday showed that retail inflation had edged marginally upwards last month. As measured by the consumer price index, it rose to 5.69 per cent in December, up from 5.55 per cent in November, driven largely by higher food inflation. This increase was expected. In his statement on the last monetary policy committee meeting, RBI Governor Shaktikanta Das had noted that the “the near-term outlook, however, is masked by risks to food inflation which might lead to an inflation uptick in November and December.” Das had cautioned that “this needs to be watched for second round effects, if any.”

The disaggregated data shows that the consumer food price index rose to 9.53 per cent in December, up from 8.7 per cent in November. Within the food basket, inflation remains elevated in cereals, vegetables, pulses and products, sugar and spices. As per analysts, the outlook for some of these items like rice, wheat and pulses remains uncertain. However, core inflation, which excludes the more volatile components such as food and fuel, has moderated further. Alongside, data also released by the NSO showed that the index of industrial production slowed down to just 2.4 per cent in November, in part, due to the base effect. For the first eight months of the year (April-November), industrial output is up 6.4 per cent.

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In a few weeks from now, Finance Minister Nirmala Sitharaman will present the interim Union budget. A few days later, the monetary policy committee of the Reserve Bank of India will meet for the last time this financial year.

In its last meeting, the MPC had voted to maintain the status quo on both rates and stance, as it decided to remain focused on the “withdrawal of accommodation to ensure that inflation progressively aligns to the target”.

In his statement Shaktikanta Das had said that “the target of 4 per cent CPI is yet to be reached and we have to stay the course.” However, in an interview to this paper, MPC member Jayant Varma recently said that “we are approaching the point where an interest rate cut is necessary to prevent an excessive real interest rate.”

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Varma argued that monetary policy can be “less restrictive” if there was expectation of inflation nearing the central bank’s target of 4 per cent. The RBI has projected inflation to moderate from 5.2 per cent in the first quarter of 2024-25 to 4 per cent in the second quarter and 4.7 per cent in the third quarter. Considering that the US Federal Reserve has also hinted at the possibility of rate cuts next year, in its coming meetings, the MPC should provide some forward guidance on the possible trajectory of interest rates.