If trend persists, RBI may be faced with a dilemma of choosing between inflation & growth
Food inflation hit double digits after six months, touching 10.49 per cent in April. It also pushed the overall rate of price rise to 7.23 per cent, compared with 6.89 per cent in the previous month.
Manufactured product inflation rose to 5.12 per cent from 4.87 per cent in March, as the rupee depreciated against the dollar and higher indirect taxes came into effect from April.
This, analysts said, may pose a dilemma before the Reserve Bank of India (RBI)—whether to tame inflation or boost industrial growth that contracted 3.5 per cent in March. However, before deciding whether to cut rates or not in the mid-quarter review in the second half of June, the central bank would have another set of data on inflation and industrial growth. Industrial growth in April may not be as weak as that seen in March, owing to the base effect, analysts said.
According to official data released on Monday, the rate of price rise for vegetables showed a steep rise—from 30.57 per cent in March to 60.97 per cent in April. Inflation for fruit showed a steep fall, recording deflation of 15.34 per cent, compared with 4.5 per cent deflation in the previous month. In vegetables, inflation for potatoes soared from 11.6 per cent in March to 53.44 per cent in April.
Finance Minister Pranab Mukherjee said food inflation was a matter of concern and sought cooperation from states to tackle the issue. “Food inflation can be tackled by creating storing facilities and cold storage chains. Institutional reforms are also required in agricultural marketing….In both these areas, state governments have to take appropriate steps. I will discuss this issue with these,” he said.
Agriculture marketing is a state subject, and most states have respective agricultural produce market committee Acts to regulate such sales.
Inflation for manufactured products was a tad higher than that in March, reflecting the impact of the rise in excise duty, railway freight and the rupee’s depreciation against the dollar, stated a YES Bank report. In this category, pressure was exerted by the processed food sector, as inflation in this segment rose from 5.93 per cent to 6.50 per cent. Non-food manufactured inflation, or core inflation, rose 0.84 per cent month-on-month in April. However, on a seasonally adjusted basis, it contracted 0.13 per cent month-on-month, the first monthly contraction in one year, said the report.
C Rangarajan, chairman, Prime Minister’s Economic Advisory Council, termed the inflation data “very uncomfortable statistics”. “Many people have been seeking easing the monetary policy. But the recent rise in inflation makes it difficult for RBI to moderate the policy,” he said.
RBI had, in its April 17 annual policy meet, cut the repo rate by 50 basis points to eight per cent. It had, however, indicated if inflation persisted, there might be no further cuts.
Rangarajan said the scope for action on the part of RBI would be narrowed by the rising inflation. The possibility of lowering interest rates would arise only when inflation declined, he added.
Shubhada Rao, chief economist, YES Bank, said elevated inflationary expectations and headline inflation would remain constraints to aggressive easing in interest rates in the current financial year. She said she expected an additional cut of only 25 basis points in the policy rate in the entire financial year.
The inflation numbers released on Monday would result in a pause on the part of RBI, said Siddharth Shankar, director of financial services firm KASSA.
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