Decline in CPI: Has the long waged battle finally been won?

With the Consumer Price Inflation (CPI) easing to the lowest rate since Jan 2012, at 8.79%, the talks about the good old days returning back to the Indian fold are in plenty, in the market and political circles.

Is the long sought relief from ‘demonic’ inflation finally reached the horizon, with a promise for Indians dreaming to lead high inflation free days ahead?

Indubitably, it’s a welcome sign, but describing it to be an indicator of any sorts is a dumb cry to make. Don’t purchase the theory, even if rockstar governor Raghuram Rajan sells it, until the fat lady sings.

TOO EARLY FOR THE CAT TO BE DECLARED ‘BELLED’

Although, signs articulate India is on its way ahead on a disinflationary path and food inflation calming down to 9.9 per cent – vegetables prices returning back to normal – much of the core inflation is as pigheaded and devilish as ever.

Too early it is to call “all is well” as cooling down of inflation has fooled us numerous times before as well. There were also similar signs in the middle of the last year. High inflation rate was biding goodbye, we all were happy, so were the UPA and the RBI – the monster returned and arrived on huge wave after May.

But, the RBI has this time already tightened its belt in advance and increased policy rates by 75 basis points since August. Mind you, the results have begun to disembark, although, real effect would only be witnessed after 3 more months.

The rates have been increased substantially, when compared to last two years – providing some incentive to the common-Indian-saver who loves to save as much as she can.

But rates are still far lower to affect an increase in savings and revolutionize the mood of the general public. A nominal rate maybe attractive but not the real ones, but correction is on its path and better is only expected in the future. Negative post-inflation returns have troubled us for long, for sure.

NO MORE RATE CUTS TO BE EXPECTED ANYTIME SOON

In the last monetary policy when Rajan came up with sudden escalation in the policy rates, industry went berserk & critical, terming his stance as anti-market and of course growth killer. The RBI would be under pressure this time, in its next monetary outing, and more rate hikes may not be a good idea. But expecting rate cuts, to propel sluggish economic growth is not expected of him too.

There is no trade-off between growth and inflation and even if it comes at losing growth, then it must be – he said, if economists of the country are to be believed.

A gradual path of disinflation, as Urjit Patel committee suggests, is a good way to go, but playing with the existing policy rates at this moment can be suicidal when savings have found a momentum of sorts, at least it looks this way, currently.

Gap between CPI and Policy rates must be narrowed as much possible and at the earliest -but on what ‘correlation’ is the RBI working?

There is not much the central bank can do on the front of rate cuts right now, but it must clear to itself first – is it working to contain inflation as other central banks do or steer our economy out of sluggish mode?

Tough it may sound and it’s, but setting priorities right at the earliest can spare a lot of trouble later.

A healthy economy is the one which has its GDP higher than the existing CPI rates – right RBI? You must know what to target when.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of our organisation.