India’s inflation continues to dupe government and the monetary authority alike and just when it seems that prices are easing, they begin to rise again. Latest reported data of food inflation shows that the pace of rise in food commodities’ prices increased by more than a percentage-and-a-half within a week. Fuel price inflation too continues to remains at higher levels. Manufacturing inflation has already been seen rising sharply in last couple of months. All this is likely to result into a significant jump in headline inflation for March.
The reversal of the direction of movement in food prices will only add to the pressure being faced by the Indian monetary authority. The sharp increase in manufacturing inflation has already forced the RBI to take a mid-cycle action and raise policy rates by 25 basis points in second half of March 2010. As the food inflation generalises into broader economy, RBI may have to make even stronger moves to ensure the inflation scenario does not go out of hands.
Most economists seem to agree that now was the time for the RBI to start using the monetary toolbox aggressively to tame inflation. The Prime Minister’s Economic Advisory Council (PMEAC) in fact believes that the RBI may even act before the monetary policy review itself scheduled for April 20. While given the little time left before the policy release, it looks difficult and probably unnecessary too, a strong RBI action is imminent by all means.
G Govinda Rao, member of the PMEAC said on Thursday that the RBI may hike both the CRR (cash reserve ratio, which measures the amount of money that banks have to park with the RBI) as well as the benchmark policy rates (repo and reverse repo).” He added that the tightening of policy stance is something which is very much likely to happen and the industry should be prepared for it.
Earlier the Planning Commission, the apex economic strategy maker of the country, too had said that the time was ripe for RBI to balance the objective of economic growth and inflation. The government too now seems to be unwilling to press the central bank to keep growth objective ahead of prices stability, something that it has been doing throughout most of the last fiscal.
A key reason for the RBI to get more wary of the food inflation was earlier being perceived as a result of the supply side shock. During second half of the FY10, it was professed that failure of monsoon and resulting expectations of decline in food commodities’ supply might be pushing inflation. However, now that it has become clear that a good rabi harvest is around the corner, if still the prices remain high, then there is certainly a role for the money supply dynamics to play.