Opinion RBI unlikely to pivot on rates

The latest inflation data points towards a continuing dilemma for the monetary policy committee. Retail inflation, as measured by the consumer price index, rose to 5.08 per cent in June, up from 4.8 per cent in May. But this increase was largely on the back of rising food prices. Core inflation, which excludes the volatile fuel and food components, remained subdued, indicating that the underlying price pressures in the economy are muted. With this reading, inflation has now averaged 4.9 per cent in the first quarter (April-June) of the ongoing financial year. This is in line with the RBI’s forecast that was released in the last monetary policy committee meeting. But an immediate policy pivot is unlikely.

The disaggregated data shows that food inflation edged higher to 9.36 per cent in June, up from 8.69 per cent the month before. Inflation is elevated in cereals, fruits, vegetables, and pulses. Vegetable inflation has now, in fact, been in double digits for several months, in part reflecting the impact of the heatwave. As food accounts for a higher share of the consumption basket of the poor, they are impacted to a greater extent by these high prices. Much now depends on the rains. While the monsoon has picked up in July, La Nina is expected to emerge only in August. The spatial and temporal distribution of rainfall will have an impact on food output and prices. As on July 15, the area sown under kharif crops is about 10 per cent higher than last year. On the other hand, non-food inflation remains low. In most of the segments such as clothing and footwear, housing, household goods and services, recreation and amusement and education, inflation is below 4 per cent, the personal care segment being the exception. However, there are some upside risks. The recent tariff hikes by the telecom operators will exert upward pressure. There is also uncertainty over commodity prices. Higher crude oil prices — the price of the Indian crude oil basket has risen to $86.09 per barrel in July, up from $82.55 in June — could also have an impact.

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In the last meeting of the monetary policy committee, two members — Jayanth Varma and Ashima Goyal — had voted to change the policy stance to neutral and to reduce the policy rate by 25 basis points. However, the committee chose to maintain the status quo. Recently, RBI Governor Shaktikanta Das reiterated his position, saying that “it is too premature to talk about interest rate cuts”. Healthy economic growth — the central bank has projected it at 7.2 per cent this year — provides the MPC the “policy space to remain focused on inflation”. As core inflation remains low, greater clarity over the monsoon and the trajectory of food prices will influence policy.