Continuing its pause the policy rate and stance in its December meeting, the Reserve Bank of India’s monetary policy committee underlined that consumer inflation is on the higher side of expectation.
The MPC now expects consumer price index-based (CPI) inflation to average at 6.8 per cent in the October-December period (current quarter), and at 5.8 per cent in January-March 2021. This is substantially up from its initial estimate of it falling in the 4.5-5-5 per cent range in the second half of the financial year (FY21).
“The outlook for inflation has turned adverse relative to expectations in the last two months. The substantial wedge between wholesale and retail inflation points to the supply side bottlenecks and large margins being charged to the consumer,” the MPC said in its statement.
RBI Governor Shaktikanta Das said there are three factors which are fuelling the spiralling of consumer inflation: supply chain disruptions, excessive margins and indirect taxes.
The second factor is visible from the wide margin between consumer and wholesale inflation seen in the months since the Covid-19 lockdown. Heavy excise duties on petrol and diesel are also adding to costs of most goods and services.
Not much is known about the biggest contributor to inflation—supply chain disruptions— beyond the obvious factors Covid-19 led restrictions and vagaries of the weather (untimely rains, flooding etc) in parts of the country.
The disruption could well be in the supply itself rather than the supply chain. It could be labour shortages in some cases, and in others, many small and informal firms may have stalled activities, resulting into lapses in production and logistics, economists said.
On core inflation, he said that cost-push pressures continue to impinge on core inflation, which could remain sticky.
Though the MPC has kept the policy stance accommodative, experts warned about a change of course earlier than expected.
“RBI considers current high inflation levels to be mostly supply driven for now, but if core inflation levels continue to show a persistent upward trend and push inflation expectations upwards, markets should be prepared for a rather quick change in the current course, earlier than expected,” said Rajni Thakur, economist at RBL bank.
The impact from moderating prices of perishable foods would be but a transient relief, Das said. Having said that, the MPC found that inflation expectations of households have eased modestly in anticipation of the seasonal moderation of food prices.
On growth, the MPC sang a pleasant note by saying that we have already moved from the GDP contraction phase, back to marginal expansion. The committee with three new members sees India’s real GDP growing 0.1 per cent in the current quarter, followed by 0.7 per cent growth in Q4.
But as the signs of recovery are not broad based, but dependent on sustained policy support, inflation moderation will still take time, the MPC said.
Growth now needs to be looked beyond the pent up demand towards a more sustained and high quality growth, Governor said in his statement.
Further, injection of liquidity through the build up of forex reserves, which has a tendency to become inflationary, is also being balanced through reverse repo operations, under which banks are parking close to Rs 7 trillion on most days. This is helping the movement of inflation to further uncontrollable levels.
The MPC pause was on expected lines, said experts.
“The concern that price pressures are spreading, and the strong defence of price stability indicate that the room for further rate cuts is negligible, but rates will remain low for a long period due to extended pauses,” said Aditi Nayar, principal economist at Icra.
But the pause also raises some key expected concerns, too.
“Businesses, especially the small ones and those in the informal sector, will continue to face high borrowing interest rates on working capital,” Rumki Majumdar, economist at Deloitte India wrote in a note.
They concurred on the fact that MPC has once again prioritised growth over inflation