What is core - inflation or expectation? Ask RBI

Inflation numbers for May are out, and as expected it is higher. A disappointed market declined, fearing the Reserve Bank of India may hold its policy rate when it reviews its monetary policy on 18 June.

Select economists are not in favour of a rate cut, but the markets and industry honchos desperately seek one.

So what will be the RBI’s consideration while taking a decision on the rate?

The RBI will have headroom to ease if core inflation ( non-food manufacturing inflation) is below 5 percent, JPMorgan said today on CNBC-TV18. And participants in the government bond market say the central bank is bothered more about this core figure.

A Reuters report said analysts estimated core inflation in May at 4.85 percent, almost same as in April, when it was around 4.9 percent.

So if it is core inflation that matters, the central bank should affect a rate cut, at least of 25 basis points.

But there is a catch. The March inflation figure has been revised upward sharply to 7.69 percent from 6.89 percent.

This is a concern. Terming the revision a “massive negative”, Rajeev Malik, economist, CLSA, was quoted as saying in a Reuters report that he expected the May inflation also to be revised to near 8 percent level.

“I don’t think this data, especially the revision, gives much of breathing space to the Reserve Bank of India to cut the repo rate, maybe the cash reserve ratio (by 25-50 basis points) but bear in mind that the RBI has indicated it is comfortable with liquidity,” he said.

Add this to the higher core inflation of 5.74 percent that finance minister Pranab Mukherjee gave in New Delhi after the release of the data. The figure has been coming down consistently , he said.

Nonetheless, what matters more, under the present circumstance, is the expectation. The market and industry will be thoroughly disappointed if the RBI decides against a rate action.