<p class="bodytext">It has been known that retail price inflation is not under control and it will take many more months for it to reach benign levels. The Reserve Bank of India (RBI) had expected it to remain elevated in the near term. But its surge to a 14-month high of 6.2% in October, up from 5.5% in September, has come as a surprise. This is above the RBI’s comfort level and exceeds its upper limit of tolerance, considering that its mandate is to hold inflation between 4% and 6%. Food prices, especially the prices of vegetables, have driven the price line up. Vegetable inflation rose by 36% in September and 42% in October. Cereal prices were up by about 7% and pulse prices by nearly 8%. The prices of edible oils have also seen an increase.</p>.<p class="bodytext">The food price levels are likely to ease in the coming months. The monsoon has been generally beneficial to crops and the arrival of the fresh harvest will soften the price pressures; the rabi outlook is also good. The cereal buffer stocks will be a check on prices but the RBI may now revise its inflation forecast of 4.8% for the third quarter and 4.2% for the fourth quarter due to the October surge. A potential rise in oil prices due to geopolitical factors and the depreciation of the rupee can also have an impact. Core inflation which had stayed relatively benign also rose to 3.7% year on year from 3.5%. Wholesale Price Inflation is on a four-month high. There are indications of an economic slowdown too. The RBI has projected GDP growth at 7% in the second quarter and 7.2% for the year but there are other projections of a sub-7% growth.</p>.<p class="bodytext">The Monetary Policy Committee of the RBI, in its meeting last month, kept the benchmark policy interest rate unchanged but changed its policy stance from “withdrawal of accommodation” to “neutral”. This change in stance was considered to be a precursor to cuts in policy rate in the subsequent meetings though the apex bank has maintained that fighting inflation and bringing it down to 4% is its first priority. There have been expectations that a rate cut may be effected in the next meeting, in December. The rate reductions made by other central banks have also lent support to the idea. However, the heightened inflation levels have made sure that the central bank will not consider a rate cut soon.</p>
<p class="bodytext">It has been known that retail price inflation is not under control and it will take many more months for it to reach benign levels. The Reserve Bank of India (RBI) had expected it to remain elevated in the near term. But its surge to a 14-month high of 6.2% in October, up from 5.5% in September, has come as a surprise. This is above the RBI’s comfort level and exceeds its upper limit of tolerance, considering that its mandate is to hold inflation between 4% and 6%. Food prices, especially the prices of vegetables, have driven the price line up. Vegetable inflation rose by 36% in September and 42% in October. Cereal prices were up by about 7% and pulse prices by nearly 8%. The prices of edible oils have also seen an increase.</p>.<p class="bodytext">The food price levels are likely to ease in the coming months. The monsoon has been generally beneficial to crops and the arrival of the fresh harvest will soften the price pressures; the rabi outlook is also good. The cereal buffer stocks will be a check on prices but the RBI may now revise its inflation forecast of 4.8% for the third quarter and 4.2% for the fourth quarter due to the October surge. A potential rise in oil prices due to geopolitical factors and the depreciation of the rupee can also have an impact. Core inflation which had stayed relatively benign also rose to 3.7% year on year from 3.5%. Wholesale Price Inflation is on a four-month high. There are indications of an economic slowdown too. The RBI has projected GDP growth at 7% in the second quarter and 7.2% for the year but there are other projections of a sub-7% growth.</p>.<p class="bodytext">The Monetary Policy Committee of the RBI, in its meeting last month, kept the benchmark policy interest rate unchanged but changed its policy stance from “withdrawal of accommodation” to “neutral”. This change in stance was considered to be a precursor to cuts in policy rate in the subsequent meetings though the apex bank has maintained that fighting inflation and bringing it down to 4% is its first priority. There have been expectations that a rate cut may be effected in the next meeting, in December. The rate reductions made by other central banks have also lent support to the idea. However, the heightened inflation levels have made sure that the central bank will not consider a rate cut soon.</p>
