Pace of inflation fall not to RBI's liking

The country’s inflation rate is not coming down as fast as the central bank would like and upside risks remains, according to Reserve Bank of India (RBI) Deputy Governor Subir Gokarn.

The wholesale price index-based inflation eased from 8.58 per cent in October to 7.48 per cent in November, the lowest this financial year. However, food inflation, which has a weight of nearly 15 per cent in the index, has accelerated for two consecutive weeks, snapping a seven-week easing trend.

“The downside risks to growth are abating and upside risks to inflation are increasing. This is the balance that we are now focusing on in terms of potential action,” Gokarn said on the sidelines of a seminar organised by CARE Ratings.

RBI had left key policy rates unchanged in its mid-quarter review of the monetary policy, announced last week, taking a pause the first time this year. However, as it sounded caution on inflationary pressures, analysts expect a 25 basis points (bps) increase in interest rates in the third quarter review of the monetary policy in January-end. The current repo rate is 6.25 per cent and the reverse repo is 5.25 per cent.

Rising global commodity prices could pose upside risk to inflation, Gokarn said. But RBI may not take into consideration the recent spike in onion prices as it is largely due to a demand-supply mismatch.

“It (rise in onion prices) shouldn’t really matter because it will normalise too soon for any macro policy response to be effective,” he said.

“(It is) a one-off spike which doesn’t go beyond a few weeks as the food minister has indicated. We will rely on the judgement of his predictions. I think that is not going to (be) factor(ed) into our calculations,” he said.

Onion prices have surged over the last few days on tight supplies as unexpected rain in Andhra Pradesh, Karnataka and Maharashtra cut output. However, wholesale prices came down on Wednesday after the government scrapped the Customs duty to encourage imports. Onion prices have shot up to about Rs 80 per kg in the retail markets.

However, with some state-owned oil marketing firms raising prices of petrol and talk of a rise in diesel prices, this could be a spike in inflation. RBI projects end-March inflation at of 5.5 per cent.