Inflation again presented a difficult situation for the Reserve Bank of India (RBI), ahead of its annual policy for 2012-13, as the rate of price rise for food items approached double digits in March. However, falling manufacturing numbers pulled down overall inflation. The central bank is, however, widely expected to cut policy rates tomorrow.
Overall inflation fell to 6.89 per cent in March, compared with 6.95 per cent in the previous month, owing to the easing inflationary pressure on manufactured products, official data released on Monday showed. Food inflation rose to a five-month high of 9.94 per cent in March, compared with 6.07 per cent in February, and deflation in January.
Finance minister Pranab Mukherjee termed the trend of rising food prices “disturbing”, saying the government would have been more comfortable had inflation been closer to 6.5 per cent. He added supply-side measures had to be addressed to bring food inflation down, something industry chambers have long been batting for.
“We shall have to be alert on it....Of course, the supply side constraint substantially effects food inflation. We will be addressing that,” the finance minister said.
On the monetary policy front, most economists believe RBI would opt for a rate cut tomorrow. However, there are several cautionary voices. Some economists, along with industry chambers, have been saying food inflation could not be tackled through monetary tools. RBI, however, had refused to budge and did not cut policy rates since March 2010, even when manufactured items had shown a moderating trend.
Pronab Sen, principal advisor in the Planning Commission, said it would be ideal to wait for a month or two to see a definitive trend on how manufactured inflation was behaving. “We have had two months of good news on manufacturing products’ inflation. However, one needs to wait, as once inflation spirals out of control, it becomes very difficult to control,” he said.
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A note by Crisil said it was still premature for RBI to start reducing policy rates. “First, upward risks to headline inflation remain significant. Both food and fuel inflation are expected to remain high during 2012-13. A weak rupee and the pass-through of indirect taxes into prices could also add to inflationary pressures,” the note said.
Crisil said any pick-up in investment growth was more reliant on the easing of policy-related bottlenecks, rather than on a reduction in interest rates.
Siddharth Shankar, director, financial services firm KASSA Group, said, “I feel RBI should not cut the interest rates in the meeting on April 17. The macro economic factors still do not favour a rate cut.”
Though the rising food inflation can be partially attributed to the base effect, as food inflation had started declining from double-digit figures in the year-ago period, economists advised caution on the inflation front. Though food inflation stood at 9.41 per cent in March 2011, it represented a 1.27 percentage point decline over the inflation in February 2011.
The base effect also contributed to core inflation. Core inflation, considered the most important factor in determining monetary policy, fell to 4.7 per cent. It stood at seven-year high of 8.5 per cent in March 2011, said Icra economist Aditi Nayar. She expects RBI to reduce the repo rate by 25 basis points, as core inflation is expected to remain at five-six per cent in first half of the current financial year.