Retail and wholesale inflation numbers for October will provide some comfort to the economic policy establishment. Wholesale prices, as measured by the Wholesale Price Index (WPI), remained in the contraction zone for the seventh consecutive month despite the favourable base effect waning to some extent. Unless there is a big shock to crude oil prices on account of the ongoing conflict in West Asia — the odds of this happening appear small at the moment — the commodity price environment will continue to remain benign.
Retail prices as measured by the Consumer Price Index (CPI) — it is also the benchmark measure for India’s inflation targeting framework — grew at 4.9%, thanks to a significant moderation in vegetable inflation. While there is little that monetary policy has done to bring this number down from its 7.4% print in July, it will significantly ease the pressure on the central bank’s Monetary Policy Committee (MPC) to take drastic action to underline its credibility in fighting inflation. Sure, the MPC is expected to continue with its hawkish rhetoric about the 4% inflation being sacrosanct. But what matters is that hawkish commentary does not hurt growth, interest rate hikes do, and any interest rate hike over and above the 2.5 percentage points already administered in this rate hike cycle would have hurt growth significantly.
Does this mean all is well on the inflation front? Not exactly. Prices of cereals, pulses, milk and now sugar are still growing at a pace which is far from comfortable. This situation could worsen if El Nino conditions are detrimental to the prospects of the winter crop and another seasonal shock in vegetable prices coincides with it. If things get really bad on this front, the economy will have to suffer rural demand deflation on account of the government’s supply-side management of the food economy.
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