After showing signs of moderation in the past few months, inflation reared its ugly head once again in February and rose to 6.95 per cent from 6.55 per cent in January. Even so, a break-up of the figures may give conflicting signals to the Reserve Bank of India (RBI) on rate cut in its monetary policy review tomorrow.
While food inflation has risen by over six percentage points in a span of just one month — from deflation to 6.07 per cent, the rate of price rise in manufactured products declined to 5.75 per cent in February from 6.49 per cent in January, according to official data released on Wednesday.
While the monetary policy works more on manufactured products inflation, the spurt in food inflation cannot be overlooked, feel economists.
Finance Minister Pranab Mukherjee admitted the existence of inflationary pressures, but expressed confidence that the rate of price rise would be close to 6.5 per cent by the end of the current financial year. “Inflationary pressure is there.... We will end the year with around 6.5 per cent (inflation),” he said, emphasising on some easing in the rise in prices of manufactured goods.
Most economists believe that RBI should not hasten to cut policy rates tomorrow, even as manufactured product inflation has come down.
“Although inflation related to non-food manufactured products declined in February, this benefited from a favourable base effect, with the index level rising by 0.4 per cent in month-on-month terms,” said Aditi Nayar, economist at rating agency ICRA. “In such a situation, the elevated price of crude oil stoking domestic inflationary pressures poses a significant concern. Accordingly, we expect the RBI to leave the repo rate unchanged.”
Other experts also point out the latest inflation numbers could prompt the central bank to leave the key policy rate untouched in its mid-quarterly policy review meeting despite the economic growth expected to slow down.
“Food inflation will be on the rise and coupled with this would be fuel inflation,” according to said Siddharth Shankar, director, KASSA group. “Going forward in third quarter of this year, food prices may moderate but I expect the fuel inflation to move up sharply,” he says. The changing food patterns are the cause of inflation and even fiscal measures cannot combat that, he adds. “It is only focus on agriculture that will reduce inflation.”
The Confederation of Indian Industry says the upturn in inflation spelt bad news for the industry at a time when the industry was reeling under the impact of an investment-led slowdown caused by a tight monetary policy and with manufacturing sector growing at a modest 4.4 per cent during April-January 2011-12.
Chandrajit Banerjee, director-general of the industry chamber, says an increase in food inflation called for adequate supply-side responses to address the structural bottlenecks facing agriculture production and distribution.
Some other economists, however, call for a rate cut by the RBI.
The finance minister is expected to announce some measures to tackle inflationary pressures in the Budget. RBI has already cut the cash reserve ratio by 75 basis points last week infusing Rs 48,000 crore into the system.
Earlier, official data showed a 6.8 per cent growth in the industrial output in January, against just 2.5 per cent in the previous month. However, except for consumer non-durable goods, other sectors did not show much upturn, again giving confused signals to the central bank.
