Why RBI mentioned 'inflation' 79 times in its policy document

Seventy-nine. That’s the number of times the Reserve Bank of India (RBI) mentions “inflation” in the press release issued after its monetary policy review on Tuesday. In contrast, “growth” is mentioned 68 times (10 times in reference to global, not local, growth).

Gives you a good clue as to where the focus of the Reserve Bank of India lies, doesn’t it? Yes, that’s right - inflation.

With good reason. “Inflation is nowhere close to being tamed,” was the loud and clear message of the RBI’s statement.While the wholesale price index (WPI) declined to 7.47 percent in December, down from 9.11 percent in November, the RBI was at pains to stress that it was not a sustainable trend by any stretch of imagination.

[caption id=“attachment_192541” align=“alignleft” width=“380” caption=“RBI Governor D Subbarao. Reuters”]  [/caption]

Here’s what the statement said about the different components of the WPI.

Food prices:

Governor D Subbarao acknowledged that declining food prices are a seasonal trend and unlikely to last. Indeed, Firstpost has already pointed out that the sharp decline in food prices in the past few weeks could be attributed to sharp declines in onion, potato and vegetable prices, which account for less than 3 percent of the WPI.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

The prices of protein-based items-milk, fish, eggs and meat-which are becoming an important part of the Indian diet, continue to climb. “As such, the decline in food inflation is likely to be limited in coming months. Beyond this, inflation in respect of protein-based items remains high.

“In the absence of appropriate supply responses of those commodities where there are structural imbalances, particularly protein-based items, risks to food inflation will continue to be on the upside. Significantly, there has been reduction in rabi acreage for pulses, which may have an adverse impact on prices,” the RBI said. The food group accounts for about 14 percent of WPI.

Translation: Food prices are not going to fall for much longer.

Fuel prices:

The fuel group accounts for another 15 percent of WPI. This is another component that the RBI believes won’t experience lower prices in the near future. Fuel inflation came in at a high 14.9 percent in December. “….there is sizeable suppressed inflation in the fuel group as administered prices do not fully reflect the market prices,” the RBI noted. “The current levels of domestic prices of petroleum products do not reflect international prices.”

Currently, oil marketing companies have refrained from hiking fuel prices because of upcoming state assembly elections. But come March/April, it’s very possible we will see a fuel price hike - and a boost to general inflation.

Of course, petroleum products won’t be giving the only push. “Since coal is an input for electricity, coal prices, as and when raised, will also have implications for electricity tafiffs,” the statement added.

Translation: Rising coal and petroleum prices are likely to pull inflation higher.

Manufacturing inflation:

No good news here either.“The momentum indicator of non-food manufactured products inflation is yet to show a discernible downward trend,” the statement said.

In addition, the data for this sub-group are likely to be revised upwards, going by the revision in October numbers. A weaker rupee is also likely to add pressure on imports of international commodity prices expensive. “_…recent rupee depreciation has accentuated price pressures as reflected by this indicator (non-food inflation)”,_the central bank said. The manufactured articles group accounts for 65 percent of WPI.

Translation: Don’t expect manufacturing inflation to come down soon_._

Apart from the WPI components, a volatile rupee (which increases the local prices of imports) and lack of fiscal discipline on the part of the government were also highlighted as risks to a resurgence in inflation.

“At the current juncture, when there is a need to boost private investment, the increase in fiscal deficit could potentially crowd out credit to the private sector. Moreover, slippage in the fiscal deficit has been adding to inflationary pressures and it continues to be a risk for inflation,” the statement said.

When the government’s fiscal deficit (the gap between government revenues and expenditure) widens, it has to resort to borrowings from the capital markets, which reduces the level of funds for the private sector and increases the cost of capital as well.

“In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending. The forthcoming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”

Translation: Even if inflation falls in the short term, i__nterest rate cuts are by no means certain because the risk of a resurgence are quite high.

Given that the RBI expects inflation to fall to 7 percent by March, which is not too far off from the 7.47 percent we’re at currently, inflation has practically bottomed out. In all probability, inflation will start to rise again soon.

So, no, don’t take the cash reserve ratio cut as a signal of easing monetary policy. We’re still far, far away from that.

For the entire release, click here.