What inflation numbers say

With CPI within the tolerance band for the second month, the Reserve Bank of India may consider pausing the rate-hike cycle

Retail inflation, as measured by the Consumer Price Index (CPI), grew at 5.7% in December, the second consecutive month when the metric stayed under 6%, the upper bound of the Reserve Bank of India (RBI)’s tolerance band. The latest inflation number is slightly lower than what a Bloomberg forecast of economists projected (5.9%). Inflation for the quarter ending December 2022 stands at 6.1%, which is significantly lower than the 6.6% projection made by the Monetary Policy Committee (MPC) of RBI in its December meeting (which took place before the November CPI data was released). An analysis of RBI’s forecasts shows that the bank has overestimated inflation for all three quarters in the current fiscal year.

The economy is not out of the woods as far as inflation is concerned. Headline inflation is still above 4%, core inflation has become sticky around the 6% mark, and uncertainties continue to loom as far as food and energy prices are concerned. (MINT)

The economy is not out of the woods as far as inflation is concerned. Headline inflation is still above 4%, core inflation has become sticky around the 6% mark, and uncertainties continue to loom as far as food and energy prices are concerned. Many estimates suggest crude prices could rise above $100 per barrel as China unlocks its economy. And although food inflation has been coming down, cereal prices continue to grow at an uncomfortable pace. But the data does give rise to the question whether the economy should continue to maintain the balance of policy in favour of curtailing inflation over growth. The immediate context in which this question needs to be asked is the February 6 meeting of MPC. Will it recommend yet another rate hike, then? If RBI does raise rates in February, it will be its sixth consecutive one; there has been a cumulative increase of 2.25 percentage points in the policy rate thus far in this cycle. There is a growth cost of such aggressive monetary tightening.

This question becomes all the more relevant given the global economic slowdown. India’s growth will have to depend more on its domestic drivers. It is unlikely that the forthcoming budget will deliver a big fiscal boost to the economy. The fiscal deficit will have to be brought down, and nominal growth — the base for revenue collections — will suffer due to falling inflation in 2023-24. The central bank did well to assert its intent by aggressive tightening when it started raising rates in the current cycle. It should now consider pivoting towards supporting growth, which could start with a pause in the rate-hike cycle.