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Straight from the Specialists

The RBI and its inflation dilemma

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(Arvind Chari is a senior fund manager of Quantum Asset Management Company Private Limited. The views expressed in this column are his own and do not represent those of either Quantum AMC or Reuters.)

The wholesale price index number for September (7.81 percent) poses a dilemma for the Reserve Bank of India (RBI). With the finance ministry leaving no opportunity to make its case for lower interest rates and exhorting the RBI to take ‘calibrated risks’, the recent inflation data gives no comfort to the RBI to go ahead and confidently cut the repo rate in its October policy review.

The headline WPI number was expected to be higher than the previous month on the back of an increase in diesel and LPG prices. The RBI has factored in the rise in fuel prices in its March inflation target and would overlook the recent increases for the time being as fuel price hikes also go about solving the fiscal deficit problem. Although headline inflation would remain high in the months to come, the RBI would choose to ignore domestic fuel price increases as a policy action needed to correct the fiscal imbalance.

But the central bank would have certainly hoped for lower manufacturing and food inflation. Despite the overall industrial slowdown, manufacturing inflation remains above 6 percent, as against the RBI’s comfort level of around 5 percent. Core inflation, a flawed but popular measure of tracking inflation, has also been consistently above the 5.5 percent mark in the last 3 months. For the RBI to be comfortable with the future inflation trajectory, given the backdrop of volatile food prices in India, manufacturing inflation needs to remain below 5 percent. This is not quite the case today.

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