In stark contrast to talk of deflation in the economy, India’s retail inflation, measured by the Consumer Price Index (CPI), grew by 3.36 per cent in August. This is the second straight rise after a 2.36 per cent increase in July. The two put together undermine the growing notion of a deflationary trend taking hold after the CPI growth had decelerated for three months before July. The latest triggers for the rise in prices have been a spike in fruit and vegetable prices as well as a hike in the house rent allowance. Moreover, the impact of the newly introduced goods and services tax (GST) regime has been inflationary. Crucially, core inflation, too, has grown by 4.6 per cent. Most analysts now hold that, notwithstanding a possible easing of food inflation by October, a rate cut by the Reserve Bank of India (RBI) in its next monetary policy review is ruled out.
The RBI, which cut the repo rate by 25 basis points in its last review in August, had crucially maintained a neutral policy stance. It had, as it has done for the most part since demonetisation was announced in November last year, pointed to the uncertainty about the future trajectory of inflation. A key factor weighing on the RBI’s monetary policy committee’s decision was the likely impact of Pay Commission hikes in the current financial year. The roll-out of the GST is another factor that could upset calculations. The RBI has been severely criticised in the recent past by many for overestimating the threat of inflation while disregarding the slowdown in economic growth. There were murmurs that the central bank, in fact, contributed to the slowdown by keeping interest rates too high. The latest data would perhaps justify the RBI’s caution.
Taken together, the two bits of macroeconomic data do not present a happy picture. Rising inflation in the economy almost rules out chances of the RBI coming in to help industrial growth, which continues to disappoint possibly due to the continuing after-effects of demonetisation and the goods and services tax, which continue to disrupt production networks. A turnaround in economic growth, then, is clearly some distance away.