The Reserve Bank of India (RBI) hike of key policy rates on Thursday — the eighth time this fiscal year— indicates that the policy measures are working, albeit with a time lag.
The latest rate hikes came amid softening food inflation in recent weeks, a clear sign that the central bank is concerned over the high prices of manufactured products fanned by global commodity and oil prices.
Inflation is no longer a "food price" problem. But even as food prices started cooling — it has come down from 17% in December to 9.5% in February — non-food primary articles and oil and commodity prices are giving sleepless nights to RBI officials.
"Core inflation or non-food manufactured goods inflation, which has picked up over the last three months from an average 5.0-5.5% between June-October, 2010 to 6.1% in February, appears to be more firmly on the central bank's vigilance radar now than a quarter ago," said Abheek Barua chief economist, HDFC Bank.
There is little that monetary policy can do to tame prices of seasonal food items such as fruits and vegetables.
"The effectiveness of monetary policy in managing supply shocks is debatable, especially if inflation emanates from food prices," Samiran Chakraborty, regional head of research, Standard Chartered Bank India said in a recent research report. "But such a response is necessary to manage collateral damage from higher food prices."
RBI has acknowledged that underlying inflationary pressures have accentuated, even as risks to growth are emerging.
Rising global commodity prices, particularly oil, are a major contributor to both developments. "As domestic fuel prices are yet to adjust fully to global prices, risks to inflation remain clearly on the upside, reinforced by the persistence of demand-side pressures as reflected in non-food manufacturing inflation," it said.
Despite acknowledging the risks to growth, the RBI's guidance is that it will "persist with its current anti-inflationary stance."