Urjit Patel ‘glide path’ means RBI will stay put
Given the 73bps hike in CPI inflation for food, beverages and tobacco (FBT), it is not surprising overall CPI for March rose 34bps to 8.44%. FBT added 36bps to overall CPI and, within this, 32bps was on account of vegetables alone. In other words, though headline inflation is more or less on track—it declined from 11.2% in November—its future trajectory will very largely depend upon what happens to food inflation. In the case of WPI, headline numbers rose 102bps on the back of a 178bps rise in food inflation and 247 bps in fuel and power inflation—the former added 25bps to WPI and the latter 37bps. While the food numbers were understandable in light of unfavourable weather conditions, the fuel inflation is difficult to fathom. The press release puts the hike in LPG inflation at 9.28% after a contraction of 4.09% the month before—the fact of the matter, though, is that LPG prices have been remarkably constant for the last year, indeed the hike in the number of subsidised cylinders from 9 to 12 should have helped lower inflation.
Both numbers, though, are in line with expectations. While the volatility in food inflation is expected, the increase in manufactured inflation is probably on account of manufacturers passing on a part of past cost increases with demand picking up a bit—besides, with the output gap very low, if not negative, as RBI just pointed out, manufacturing inflation can be expected to harden as activity picks up in the economy. Which means the onus of fixing the supply side—coal and gas, for instance—is getting critical as structural imbalances are hurting inflation-fighting. It remains unclear why the government doesn’t dump FCI’s bulging stocks in the market, given how cereal inflation is a stubborn 9-10%. Also, sooner rather than later, the government needs to address the issue of whether it is accepting the Urjit Patel committee’s recommendations—as long as RBI remains wedded to Patel’s 8% CPI inflation target by January 2015 and 6% by January 2016, it is not going to cut interest rates.