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For once, the Reserve Bank of India can be easy about rising inflation

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If 7.35% wasn’t bad enough, here is 7.59%. The old foe inflation is back to trouble the Reserve Bank of India (RBI), but this time, analysts believe there isn’t much steam in it anymore.

The headline retail inflation at 7.59% in January may have reached its peak, according to Nomura Financial Advisory and Securities (India) Pvt. Ltd.

Gaurav Kapur, chief economist at IndusInd Bank, agrees. “The January reading of headline CPI is likely to be its peak and going ahead, headline inflation should ease, driven by the ongoing reversal in vegetable prices on higher production of major vegetables,” he wrote in a note. CPI stands for Consumer Price Index.

Graphic by Santosh Sharma/Mint
Graphic by Santosh Sharma/Mint

Vegetables continued to remain the biggest contributor to the rise in headline inflation in January. But prices have cooled off a bit compared with December. This is expected to further drop in the coming months.

But the story beyond vegetables is a bit of a worry. Prices of milk, pulses, cereals, edible oils, sugar, eggs, meat and fish are on the rise. While the rabi output could ease pressure from pulses and cereals, other items could remain firm for some more time.

Then there is core inflation, which has begun its climb again. Core inflation captures the demand in the economy and is a key input for monetary policy. It is now within a hair’s breadth from 4%. Much of the rise in core inflation is attributed to the recent tariff hikes by telcos and price increases of a few drugs.

But in an economy where capacity utilization is just about 70%, the upward pressure on core inflation is likely to abate, argue analysts.

Given that food inflation is on the downward path and core inflation has little reason to power ahead, most expect headline inflation to drop from here on. Kapur of IndusInd Bank expects inflation to ease to 6.8-7.0%. Economists at Nomura are penciling in an average inflation of 6.5% in the current quarter, moderating to 4.6-4.7%.

That said, the level of inflation has been significantly above the mandated target of 2-6% for two straight months now. RBI’s own forecast is that inflation will be 6.5% in the current quarter and then begin to drop.

That may not be reason enough for lawmakers to pull up the central bank for an explanation, especially when growth is floundering. In fact, the rise in inflation alongside poor growth in industrial activity is raising worries about stagflation. Calls for a rate cut are still doing the rounds in the market and Nomura expects a cut as early as April.

RBI became an inflation targeting central bank in 2017. Ironically, it now has more reasons to ignore the rise in inflation than it had before becoming an inflation targeting central bank.

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