Retail inflation at 4.31%: Why both Urjit Patel and Arun Jaitley would love the CPI number

Reserve Bank of India (RBI) governor, Urjit Patel and his colleagues at the new monetary policy panel will be happy to see the September consumer inflation falling to a 13-months low of 4.31 percent (from 5.05 percent in the preceding month), even below the central bank’s March, 2017 target of 5 percent. Reason: This, coupled with a good monsoon, would mean space opens up for the Monetary Policy Committee (MPC) to further ease interest rates without the need to face the dilemma of being pressured to do so by the growth-lobby. Most economists expect the food inflation, the guiding factor of the broader inflation, to lie low at least for the next six months on account of multiple favorable factors. Both Patel and Finance Minister, Arun Jaitley would thus love the September CPI numbers as there can be more focus on the growth-front. [caption id=“attachment_2941468” align=“alignleft” width=“380”]  Reuters[/caption] If you look at the September numbers, it’s nothing but food prices that have done the trick. The CPI food inflation fell to the lowest in a year in September—3.88 percent. The other villains in the story, CPI vegetable inflation eased to a negative 7.21 percent from 0.95 percent, while that of pulses declined to 14.33 percent from 21.94 percent in the month. That sums up the secret behind the big fall. A good monsoon saves a lot of trouble for the Narendra Modi-government and the central bank to get an aspiring economy back on track. This year the monsoon has been 97 percent of its long period average, going by IMD. The average seasonal rainfall over northwest India was 95 percent, in central India 106 percent, in southern peninsula 92 percent and in northeast India 89 percent. The monsoon is considered normal between 96 and 104 percent. This has been after two consecutive years of deficient rains. For the Indian economy as a whole, the conditions are just right to set eyes on a higher growth path. Fiscal deficit is under control, reforms are taking place, monsoon has been good and inflation is well below the central bank’s target. If the oil prices continue to favour, the economy is set for a big leap. But, the other side of this rosy picture is the grim reality that how closely dependent our inflation numbers and economy are on annual seasonal rains. If monsoon falters, all calculations go for a toss. If it rains well, all good. This highlights the need to focus more on irrigation and water conservation, especially in agriculture dominated states like Uttar Pradesh and Punjab. Also, the core inflation or inflation, that excludes volatile components, refuses to ease. It rose to 4.8 percent in September, although the sequential momentum of increase has come down. If this part of the inflation doesn’t ease in the months ahead, it could pose some concerns to the monetary policy makers. Including the latest round rate cut, the RBI has now lowered its key interest rate by a cumulative 175 basis points (bps) since January, 2015. One bps is one hundredth of a percentage point. Another 25 bps rate cut in December or early next year would take the policy rate to 6 percent. Banks haven’t passed on much of the benefits of the rate cut so far citing high NPAs (non-performing assets), poor demand and capital availability. But, with the central bank offering a clear signal of a prolonged downward trajectory of interest rates, banks will eventually run out of excuses to transmit lower rates to the end-consumer, not just to top corporations, which are enjoying cheaper funds in the money market. Hence, the sharp drop in inflation benefits the common man in two ways. Lower expenses for essential food items and prospects of cheaper money in the future, provided banks go for a meaningful reduction in their lending rates. (Data contributed by Kishor Kadam)