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The RBI has been focusing on core, or manufacturing, inflation? |
A few days after the credit policy was announced last Tuesday, the market is still scratching its head over what pushed the otherwise dovish Duvvuri Subbarao - Subir Gokarn combine to push interest rates up by 50 basis points (100 basis points make 1 percent). The RBI governor and deputy governor had gone with a 25 basis points hike on 16 June and the data since then has, if anything, shown non-food inflation to be a tad lower and growth to be a lot under strain. Gokarn has, in the past, frequently referred to the ease with which companies pass on input prices to customers as an indicator of pricing power – which is inflationary. However, an analysis of the first 43 company results by Morgan Stanley (i.e. the companies tracked by them), suggests otherwise. The data show that margins have compressed on an average by 200 basis points. In consumer staples, it is even more – by 633 basis points. Isn’t this an indication of pricing power or the lack of it? The RBI has been focusing on core, or manufacturing, inflation. This too showed a slight decline from 7.3 percent in May to 7.2 percent in June. Given these arguments, the market is wondering if the RBI knows something that it does not. The food inflation numbers released on Thursday may already have been known to the RBI. The newspaper headlines only noted the fall from the previous week to 7.33 percent from 7.58 percent. But this happened because the 7.33 percent rise came on top of the 18.56 percent jump in the corresponding week of 2010. So the RBI clearly is worried over inflation. It is probably expecting the July Wholesale Prices Index to be worse than in June, which came in at 9.44 percent. But even this does not appear to be a sufficient cause for it hawkish rate stance. There are clearly other worries down the line. The RBI probably is certain that electricity tariffs will be raised in a few months’ time. In fact it was the RBI which escalated to banks and the Union Finance Ministry the sorry state of State Electricity Board finances. Maybe that is why it has pencilled in double-digit inflation almost until October and a raise in forecasts for March 2012 to 7 percent. On the other hand, it is also possible that the RBI is genuinely incensed by the inability of the government to take tough fiscal decisions on disinvestment, foreign investment or even taxes and expenditure cuts. Hence the strongly worded message: “In the absence of complementary demand and supply side action from the government to curb inflation, monetary policy has had to do more.” But RBI on its own can’t possibly chase the headline WPI figures for long. It is eminently likely that headline inflation will continue to rise even after growth well and truly slows. That will be because of the relentless rise in global commodity prices on account of the cheapening of the dollar. What will the RBI do then? What’s puzzling about the Subbarao-Gokarn reaction pattern is that last year, despite numerous criticism, they ignored inflation to stoke a growth that was alright anyway. Now, when the ignored half of the equation is acting up (zooming inflation), they are focusing on it to the point of ignoring growth. Last year they were behind the curve on inflation. Now they appear to be behind the curve on growth. Unless, of course, they know something we don’t know.
Latha Venkatesh is the Banking and Commodities Editor at CNBC TV-18. As a key anchor with the channel, Latha is a keen observer of the monetary policy space. She has kept close watch on the Reserve Bank of India’s policy formulations and developments in the banking industry. She also tracks money market and macroeconomic trends.
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