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Elevated inflation could restrict RBI’s room for manoeuvre, bring forward timelines for policy normalisation

🔴 It could only be a matter of time before normalisation by stealth is replaced by a more formal shift of stance.

By: Editorial |
Updated: December 15, 2021 10:01:36 am
The disaggregated data shows that while non-food inflation has risen over the past few months, food inflation is also now beginning to rise.

Price pressures appear to be building up in the economy. On Monday, data released by the National Statistical Office showed that retail inflation, as measured by the consumer price index (CPI), rose to a three-month high of 4.9 per cent in November, up from 4.48 per cent in October. That inflation has risen despite the recent cuts in fuel taxes — rising crude oil prices had prompted the Centre to cut excise duties on petrol and diesel, which was followed by several states cutting back on fuel taxes as well — suggests that price pressures are getting more generalised in the broader economy. Worryingly, inflation is expected to edge further upwards with the base-effect turning unfavourable over the next few months. Even as concerns persist over the durability of the economic recovery, elevated inflation is likely to complicate the policy choices before the central bank, limiting its space for manoeuvre.

The disaggregated data shows that while non-food inflation has risen over the past few months, food inflation is also now beginning to rise. The consumer food price index rose to 1.87 per cent in November, up from 0.85 per cent in October, driven by essential commodities such as cereals, meat, fish and eggs, milk and fruits. Core inflation has also remained elevated — price pressures appeared to be more broad-based with spurts observed in clothing and footwear, household goods and services, recreation and amusement. This suggests perhaps the likely pass-through of higher costs — data released by the government on Tuesday showed that the wholesale price index (WPI) rose to an all-time high of 14.23 per cent in November. There are upside risks as well. Telecom companies have begun to raise their tariffs. And several companies are looking to hike prices. Moreover, as demand picks up, services inflation will strengthen. Household inflation expectations have already begun to witness an uptick. According to the latest survey of the Reserve Bank of India (RBI), median expectations for the current period have risen by 20 basis points, while the three months and one year ahead expectations have risen by 150 and 170 basis points.

In its last meeting, the monetary policy committee (MPC) chose to maintain the status quo on both rates and stance. Some have argued that the RBI Governor’s choice of words — “managing a durable, strong and inclusive recovery” — indicates worries around the uneven nature of the process. With continuing uncertainty on the economic front, it is possible that the committee may continue to take a more benign view of inflation, prioritising growth. But if inflation continues to remain elevated, remaining near or breaching the upper threshold of the inflation targeting framework, the dissenting voices on the committee might grow, forcing it to bring forward its timelines for normalising policy. It could only be a matter of time before normalisation by stealth is replaced by a more formal shift of stance.

This editorial first appeared in the print edition on December 15, 2021 under the title ‘A jagged recovery’.

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