Mumbai: Retail inflation in January slowed to a two-year low of 8.79%, sharply down from 9.87% in December and 11.24% in November, mainly because of a more-than-expected 13% drop in vegetable prices.
Lower-than-expected retail inflation in January and continued contraction in factory output in December for the third consecutive month may give one the impression that India’s central bank will go slow in its monetary tightening, but let’s not be too optimistic.
Indeed, Reserve Bank of India (RBI) governor Raghuram Rajan had said in January after announcing the monetary policy that a drop in inflation would allow him to follow an accommodative monetary policy, but take a closer look at the inflation data. Consumer inflation has dropped below the consensus estimate of 9.2%, but the so-called core inflation, or non-food, non-oil inflation, quickened from 8.1% to 8.11%.
This clearly means that the drop in consumer inflation is primarily driven by vegetable prices and, if the trend reverses in summer, consumer inflation will rise again. This is not a happy news and RBI will certainly not let its guard down.
It is clear that high inflation is enemy No. 1 of the Indian central bank, which does not see any trade-off between inflation and growth at this point. It is bent on fighting inflation in Asia’s third-largest economy and any sign of rise in inflation will only strengthen RBI’s resolve to tighten monetary policy.
The guiding principle of its policy is the Urjit Patel committee report on monetary policy that has charted out a road map for consumer inflation—8% by January 2015, 6% by January 2016 and 4% with a two percentage point band thereafter. Given a choice, it would like to start inflation-targeting in right earnest. However, it will need the government’s approval for that. We will get a clear picture on this after the general election due by May.
For the time being, RBI is likely to hold on to its policy rates, which it raised in January. Do not expect it to rush to cut rates because factory output is shrinking and consumer inflation dropped below 9%. Rajan is an inflation warrior and he would not rest till he breaks the back of price rise.
