Amid Rising Inflation Vigilance Holds The Key
Indian Express
In recent weeks, there has been much concern over the direction of inflation in the economy and the implications for monetary policy. Last week, when the Monetary Policy Committee kept interest
rates unchanged, the RBI pegged inflation at 5.1 per cent for the year, up from its earlier assessment of 4.6 per cent. For the first quarter, it had projected 4.2 per cent. The latest data from the National Statistics Office show that while retail inflation edged slightly upwards to 3.93 per cent in May, from 3.48 per cent in April, it was marginally lower than expectations. This also puts inflation in the quarter so far at 3.7 per cent, slightly lower than the central bank’s expectation.
Food inflation rose to 4.78 per cent, up from 4.2 per cent the month before, with tomatoes and ginger seeing a sharp surge. With weak rainfall delaying kharif planting, the outlook in this category is uncertain. In the non-food category, the rise in energy prices at the retail level (petrol, diesel, commercial LPG cylinders) seems to be reflecting in transportation — of goods and personal vehicles — and restaurants. Energy price adjustments are continuing — recently, domestic LPG prices were raised by Rs 29. Prices of other key inputs are expected to continue feeding inflationary pressures, while supply-chain and energy disruptions pose upside risks. Household inflation expectations are also firming up, with three-month and one-year-ahead expectations rising by 80 basis points and 50 basis points respectively.
The global environment continues to be in flux. On Thursday, the European Central Bank raised interest rates by 25 basis points amid concerns that the energy shock is beginning to spill over into the larger economy. Other central banks — the US Federal Reserve and the Bank of England — are scheduled to hold meetings next week. In the US, consumer prices rose at an annual rate of 4.2 per cent, complicating matters for the new Fed chair. The MPC’s next meeting will be in August. By then, there will probably be some indication of the flows being mopped up through the FCNR (B) route. Another month of price data will also be available, and there will be some clarity over the underlying growth momentum. These will shape the MPC’s decision.