Comment: Samiran Chakraborty

Stubborn inflation, difficult policy choice

With another monetary policy review approaching, inflation is again likely to dominate the Reserve Bank of India’s mindspace. In the recent past, inflation has been a mirage of sorts– every time one hopes it is coming to grips, it slips away. For a record 14 consecutive months, it has been higher than eight per cent. Inflationary expectations are likely to be undergoing structural shifts. Even till December, almost a third of inflation was caused by food prices, However, in the last two data prints, it has started looking more broad-based. While food prices have started cooling off as expected, higher prices of commodities like oil, coal, metals and cotton have neutralised any positive effect arising from the same. If these input prices stay elevated and the government is forced to raise some of the administered prices on petro products, it is possible that average inflation for the coming financial year will hover around the eight-per cent mark.

Thus, reiterating a tough resolve to tackle inflation and a 25-bps rise in the policy rates in the mid-quarter review seem to be inevitable. Till now, monetary policy was addressing the collateral damage arising from supply-side inflation. However, to what extent the central bank will acknowledge that the scale has tilted towards demand-side pressures is an open question. That will determine how far we are from the peak of the interest rate cycle and at what pace we will be moving towards the same. Also, global uncertainties and the lagged effect of monetary tightening on the sluggish capex cycle will be crucial considerations. So far, the gradual, calibrated approach of monetary policy has been designed to balance these different objectives. Stubborn inflation might force RBI to consider alternative strategies more seriously.

Samiran Chakraborty
Regional Head of Research, India
Standard Chartered Bank