Saturday, Dec 03, 2022

Don’t wait for cut

Given persistently high inflation, government must focus on managing the food economy.

According to data released on Thursday, the wholesale price index-based inflation more than doubled in June — it rose to 1.62 per cent from 0.79 per cent in May. The sharp increase in WPI comes on the back of consumer price index-based inflation rising to a 22-month high in June. CPI or retail inflation now stands at 5.77 per cent, well above the 5 per cent target set for March 2017 by the Reserve Bank of India. What this suggests is that the outgoing RBI governor, Raghuram Rajan, is almost certain not to cut interest rates on August 5 — when the next policy review is scheduled — even as his conservative approach towards monetary policy has been said to be a key point of contention between the RBI and the NDA government. From the government’s perspective, however, the continued rise in inflation also means that Rajan’s predecessor, too, is going to find it difficult to cut rates later in the year.

Given the nature of inflation in India, an interest rate cut is not likely anytime soon. For one, WPI inflation is going to suffer from the low base effect for the rest of the year — WPI inflation was in negative territory last year and any increase will appear more pronounced as a result. But more importantly, it is the trigger for inflation — both in WPI and CPI, which is the inflation that the RBI targets — that is the real cause for worry: The steady hardening of food prices. Within WPI, it is vegetables (prices rose by 17 per cent) and potato (prices rose by 65 per cent) that contributed to the uptick. Within CPI, in which food articles have much greater weightage, around 46 per cent, food inflation has sharply risen from 5.2 per cent in March to 7.4 per cent in June. The only silver lining is that food inflation is restricted to a few articles, it is not broad-based.

Inflation will be better addressed if the government ensures that the supply of food articles such as pulses, potatoes and onions is better regulated. Clearly, simply cutting interest rates is neither feasible — because inflation is well above the target — nor helpful, since the slowdown in economic activity has more to do with banks and the corporate sector being saddled with excessive debt and excess capacity. What the government should do, instead, is to reduce the largely arbitrarily set small savings rates in the economy. Doing so will allow banks to pass on the full amount of interest rate cuts that have already been introduced by the RBI in the past.

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First published on: 15-07-2016 at 12:00:12 am
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