The Reserve Bank of India (RBI) should not panic into believing that a slight spike in core inflation is a "sign of inflationary expectations getting entrenched", Niti Aayog Vice Chairman Rajiv Kumar told The Indian Express.
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The visible increase in core inflation could just be a “transitory phase”, said Kumar.
Core inflation, which excludes food and fuel components, jumped to 5.92% in April versus 4.9% five months ago in November, raising the possibility of headline inflation following suit.
As core inflation rises, there is an expectation that the RBI may hike its key policy lending rate, or the repo rate. The six-member MPC has kept benchmark interest rates unchanged at 6% since June 2017, with a neutral stance.
Kumar's comments come as the Monetary Policy Committee (MPC), the rate-setting body of the RBI, began its second bi-monthly review from June 4-June 6 in Mumbai. The resolution of the MPC will be announced after 2.30pm on June 6.
When asked whether the RBI may overreact to rise in CPI inflation, Kumar said: “RBI’s overreaction is always a concern. The word is overreaction and the key is how you define overreaction".
"Here, the key is that core inflation is already higher than retail inflation. That’s something of a worry. I looked at the composition of core inflation. The three biggest contributors are health, education and real estate, a sector which has been down and is not finding buyers. But for some reason, prices have picked up in the real estate sector. The reason may be that housing allowance has been raised,” Kumar told The Indian Express.
In the minutes of the last MPC meeting released in April, two members of the committee, RBI Deputy Governors Viral Acharya and Michael Patra, flagged the risks from core inflation, indicating a need to move towards a hawkish stance.
The MPC had forecast inflation to remain between 4.7-5.1% in the first half the current financial year.