In the last three months of 2003, inflation reared up. The annual rate, measured by changes in the Wholesale Price Index, (WPI) crossed 6 per cent. More importantly, the acceleration was not due to just one factor, such as oil prices or a deficient monsoon. | |
| It was spread over a number of sectors and commodities, particularly in manufacturing. The impact of China's insatiable appetite for commodities to feed its investment boom was evident. |
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| But, this was reinforced by domestic demand pressures as sustained industrial growth started to stretch existing capacities. |
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| During that period, the Reserve Bank of India (RBI) maintained its position that this was an aberration from an otherwise moderate situation and that inflation would fall back within its 4-4.5 per cent forecast by the end of the year. It did indeed, closing the year at 4.47 per cent, and in the process, vindicated the RBI's decision not to react with a monetary squeeze. |
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| However, the reprieve now appears to have been short-lived. Inflation has stayed well over the 5 per cent mark during the last few weeks and edged towards the 6 per cent mark for the week ending June 12. |
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| This was before the ministry of petroleum announced new prices for three of the four products still under supervision, which will add a few basis points to the rate for the week following, not to mention the impact of the simultaneous coal price hike. |
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| There are some significant differences in the external environment between the end of 2003 and now. For one, China has been actively pursuing a policy of both macroeconomic compression and sectoral restraints to try and bring its runaway investment-growth cycle under some degree of control. |
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| Global commodity prices, with the exception of oil, have started to moderate as a consequence. Oil prices have persisted at relatively high levels over the last few months, but are also now showing signs of easing. |
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| While the global scenario was not reflected in the domestic prices of the four products "" petrol, diesel, LPG and kerosene "" the prices of other petroleum products did respond and there clearly is a significant element of cost-push in the current numbers. If expectations of global moderation are realised, this pressure will also ease off in the coming months. |
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| Domestically, the likely impact of constrained capacities in many manufacturing sectors is a major source of concern. As opposed to the cost-push impact of external factors, this is a demand-pull situation, in which the conventional wisdom would argue for a contractionary stance for monetary policy. |
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| Interest rates, already under pressure because of an upturn in the demand for credit, have begun to reflect higher expectations of inflation as well. |
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| Given that these two factors appear to be counteracting each other for now, it is quite likely that some moderation in inflation will be seen in the coming weeks. |
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| Besides, it is too early to gauge the performance of the monsoon and the impact that it will have on the prices of agricultural products. |
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| Uncertainty about the policy regime may well curtail private investment spending, thus easing some of the demand pressure as well. While the situation warrants watchfulness, hasty action on interest rates is not called for. |
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