We should see core inflation dipping: RBI MPC member Ashima Goyal

While core consumer price index- (CPI-) based inflation has remained stubbornly elevated, a study of some of the underlying components of the price gauge suggest that it should ease going ahead, Ashima Goyal, member of the Monetary Policy Committee, said.

“We looked at some of the underlying components of core (inflation). We find that things like transport, telecommunications were the largest components and those are coming down,” Goyal told reporters at the State Bank of India Banking and Economic Conclave.

“Those are linked to oil prices. If that comes down, their share coming down, then we should see core also coming down,” she said. Goyal said her views were personal.

Core inflation is calculated by largely stripping away the volatile components of food and fuel. Goyal was referring to certain products that have linkages with oil prices.

Latest data showed that the headline CPI-based inflation was at 6.77 per cent in October, down from 7.41 per cent a month ago. According to analysts, core inflation was at 6 per cent, largely unchanged from the previous month. The National Statistics Office does not release data on core inflation.

The MPC’s target for headline CPI inflation is 4 per cent, while the tolerance band is 2-6 per cent. Inflation has been above 4 per cent for 37 consecutive months.

“We have dealt with extremes — pandemic and war. There is some resilience in the economy. I think this comes from our monetary and fiscal policy and structure reforms sensitive to Indian conditions. Here we have the food grain stocks, food security and at the same time, government spending towards infrastructure and other logistics. So, very good monetary-fiscal coordination,” she said.

Goyal also said while there is much commentary on the rapid pace at which the MPC has raised interest rates since May, it should be remembered that rates were reduced to very low levels during the pandemic. As such the current situation is a return to a “normal level”, she said. Since May 4, the MPC has raised the repo rate by a total of 190 basis points to 5.9 per cent.

“It is not very high or tight. But the real rate should be positive because we do have recovery and you don’t want negative real rates. We are mildly positive and that is good for the economy. It is good for anchoring inflation expectations,” she said.

“Monetary policy acts with lag… expected inflation is 5 per cent, repo rate is 5.90 per cent. We have large spreads in the Indian system,” she said.

According to Goyal, the rupee could weaken to about 83 per dollar in the first six months of 2023 and then strengthen. The rupee settled at 81.63 per dollar on Thursday.

So far in 2022, the rupee has depreciated 8.9 per cent versus the US dollar. While the local currency has marked new lows versus the dollar, it has weakened to a lesser degree than many other currencies. “If the rupee has depreciated less, it is because there’s an international belief that inflation is better, growth is better as compared to others…there is confidence in structural factors,” Goyal said.