Reports of the death of inflation that swirled around the middle of the year were greatly exaggerated, the fourth straight month of rising retail prices has confirmed. Figures released on Monday pegged consumer price index inflation, the central bank’s preferred gauge of prices, at a 14-month high.
The inflation index was driven by that ubiquitous and important protein source, pulses. In an increasingly affluent, or at any rate less poor country, prices of pulses and meat are becoming critical drivers of overall inflation, and the central bank will be keeping a beady eye on them in the months ahead. On a wholesale basis, we are still in deflation zone, but by a lot less than in previous months. Here too, food inflation has played the key role.
The Reserve Bank of India has cut rates by 1.25 percentage points this year, including a surprisingly large slash in September. There are signs that the rate cuts have delivered their tonic to the economy: The index of industrial production rose by its fastest pace in five years in October, even if it was helped by a favourable base effect and the festive season spike. Anecdotally, industrialists speak of better demand for trucks and light commercial vehicles, usually a sign that a true recovery is around the corner.
There was a view in September that the central bank had frontloaded its rate cuts; indeed, it stayed put earlier this month and the latest inflation numbers will likely ensure that there is no further relaxing of borrowing costs in the short term. There are a couple of strands that make the picture more complicated. The rupee is now trading at near 67 to the dollar with all eyes on the US Federal Reserve, which is poised to raise its rates and suck liquidity out of emerging markets and ensure a stronger dollar.
A weak rupee makes it all the more unlikely that the RBI will cut rates further. The Pay Commission’s largesse to millions of government servants is likely to spur spending, having a positive effect on the economy but also nudging inflation higher. Eyes will also be on the rabi crop, currently being sown, to see if any shortfall in acreage will lead to price spikes. All in all, despite encouragingly low crude oil prices, the risks of inflation remain; those from the glass-half-full school will see a rise in prices as proof that growth is strengthening, but the RBI will always be wary of the unintended consequences of its rate cuts.