Inflation in check, focus on growth

The moderation of the inflation rate, both at the wholesale and retail consumer levels, in April extends a welcome trend seen over the past few months. The wholesale inflation rate, measured by the Wholesale Price Index (WPI), showed only a marginal increase of 0.9% last month, marking a 14-month low. Wholesale price inflation has been low or even negative in the last two years and the last month’s figure comes as no surprise. Retail inflation, which is of greater significance for consumers and policymakers and measured by the Consumer Price Index (CPI), marked an increase of a mere 3.2% in April, the lowest level in six years. It was 3.3% in March.

It was the decline in vegetable prices in the last few weeks that accounted for the fall in the inflation rate. There was an 11% fall in vegetable prices and a 5% fall in the prices of pulses which have an important place in the food basket. The decline was mainly due to a favourable supply position resulting from climate and other factors. The government helped to ease the supply position by strengthening the buffer stocks, making open market releases, and easing import restrictions. There was a baseline effect as well because the prices peaked last April. The low liquidity in the system also contributed to the easing of pressures in the last few months. Inflation is likely to further moderate in the current financial year to about 3.5%, as against the 6% levels seen in recent years. This outlook is based on expectations of a decline in crude oil prices and an above-normal monsoon which can boost farm output.

The consistent moderation in the inflation rate from the beginning of the year has provided relief to consumers who were weighed down by high prices in the last many years. It is almost certain to have an impact on the Reserve Bank of India’s (RBI) policy decision. With inflation under control, the RBI is bound to turn its attention to facilitating growth with the help of the policy tool at its disposal. Growth rates have been under stress for various reasons and would need a boost. The RBI has already cut the policy rate by 25 basis points at its April meeting. It is almost certain that there will be another rate cut at the Monetary Policy Committee (MPC) meeting in June. There are expectations that the rate will be cut by another 50 basis points over the policy reviews to be held next month and in August.