RBI may later look at core inflation to reverse stance

The food inflation falling to a three-year low of 6.60 per cent for the week ended November 26 may prompt the Reserve Bank of India (RBI) to look at core inflation to take a call on rates cut in coming months — after pressing a pause button at its December 16 policy to perk up slowing growth momentum, economists expect.

Core inflation, which is basically the rate of price rise of non-food manufactured items, jumped to an eight-month high of 7.96 per cent in November from 7.63 per cent a month ago, according to an analysis by Yes Bank. Depreciation of the rupee against the dollar has cast its shadow on core inflation numbers.

Core inflation had risen marginally in October from 7.55 per cent in September, after witnessing a fall from the beginning of this fiscal every month. Crisil chief economist D K Joshi hopes RBI will (this Friday) halt its rate-hiking spree, and look at core inflation — besides other parameters like growth — for any reversal of the policy, which may happen some time in the first quarter of next financial year.

“Core inflation has marginally increased,” he notes. “The depreciation of the rupee is affecting inflation through prices of imported items. Had rupee not depreciated, inflation would have fallen to below nine per cent.”

Deloitte, Haskins & Sells director Anis Chakravarty notes that successive rise in policy rates by the central bank has not helped inflation to cool down. “RBI should pause,” he adds.

Chakravarty says the central bank needs to sit with the finance ministry to chalk out a coordinated policy, as the government’s fiscal policies are running in conflict with RBI’s tight monetary moves.

In the first seven months, the Centre’s fiscal deficit has already consumed over 74 per cent of what was planned for the entire 2011-12. Chakravarty now believes that RBI may go for a reversal of rise in policy rates from the first quarter of this financial year.

HDFC Bank chief economist Abheek Barua says manufactured goods inflation — despite a visible slowdown in industrial growth — has remained firm at 7.7 per cent, with core inflation picking.

“This indicates that even as demand conditions have cooled, input pressures remain. Also, the recent depreciation in the rupee has offset easing global commodity prices. With growth slowing much more than expected and the likelihood that headline inflation could cool to seven per cent by March 2012,” Barua says.

“The central bank is likely to build in a dovish rhetoric in its monetary stance leaving the door open for a possible CRR cut in January and a repo rate cut in first quarter of 2012-13.”