economy | IST

Latha Venkatesh explains CPI data: RBI may need to rethink retail inflation mandate

The Reserve Bank of India's CPI inflation target is 4 percent, which was already reached in September, and the trajectory is running higher than what the RBI projected—3.8 percent for the end of the year. Latha Venkatesh explains what the MPC can do.

The Consumer Price Index-based (CPI) inflation at 3.99 percent in September has come closer to an average of the Reserve Bank of India's mandated target. We should look at the inflation numbers a little more closely than we normally do. Lately, it has always remained below 4 percent so we never worried much about it.
At 3.99 percent, the number this time around deserves a little more importance because it is not just that the overall inflation has come in at 4 percent but the sharp rise in food inflation. It has surged to 5.11 percent from 3 percent in August -2 percent in November.
As we get to the next two months because of the adverse base, you will see food inflation going all the way to 7 percent and 8 percent and this will have an impact on the overall inflation. In the current month itself, the vegetable inflation is at 15.5 percent and pulses at 8 percent. Both are very important protein components and very heavy items in the CPI basket itself.
Core inflation
However, to counter it, you have core inflation, which has collapsed to 4 percent. In the wholesale index, core inflation had come at minus 1 percent. So you have a manufacturing sector, which is not able to price its products and the food inflation that is shooting up like a rocket. It is a rather unfortunate problem for the RBI's Monetary Policy Committee.
The MPC's mandate is 4 percent, which was already reached in September. The trajectory is running higher than what the RBI projected—3.8 percent for the end of the year.
What can the MPC do?
Given the adverse base, for sure, we are going to end north of 4 percent. So what can the MPC do? The one option it has is to reinterpret the 4 percent mandate and say we have to remain in and around 4 percent. We remained under 4 percent for so long, it shouldn’t matter if we are a little above 4 percent for some time. If it interprets it and gives itself some space, it will be able to support growth as there is no taking away from the fact that growth need support if you looked at the last IIP number of minus 1.1 for August.
Clearly, growth needs a little more support and therefore, it will be interesting to see. The coming MPC in December will have to rethink its mandate, reinterpret it in such a way that it can continue to help growth. Nevertheless, those who are looking at 100 bps cuts are left - that kind of conversation will go out of the chatter.