Informist, Tuesday, Dec 7, 2021

By T. Bijoy Idicheriah

MUMBAI - The Reserve Bank of India may now train its guns on core inflation much more than headline inflation as CPI inflation has returned to the target band of 2-6%, a banking industry source told Informist.

RBI will need to see what supply-side measures can be taken by the government to bring core inflation under some control, the source said.

While headline CPI inflation has averaged 5.2% in the first half of 2021-22 (Apr-Mar), down from 6.2% in 2020-21, core inflation has increased.

In 2020-21, core CPI inflation averaged 5.7%. In Apr-Oct, it has averaged 6.0%. Data released last month showed core CPI inflation rose 30 basis points to 6.1% in October.

The Monetary Policy Committee began its three-day meeting on Monday. Governor Shaktikanta Das will announce the committee's decision Wednesday. According to an Informist poll, the committee will leave the repo rate unchanged at 4.00%. However, half of those polled see the reverse repo rate being increased by 15-40 bps.

"In headline inflation, the most sensitive segment is food. And if you quickly act on food supply, then headline inflation immediately comes into range. From here on, containing core inflation has to be the next focus," the source said.

The government has taken several steps in the past few months to ease the pressure on inflation from food prices, with edibles oils, pulses, and key vegetables such as onions being the focus of these measures.

Most recently, the government also cut the excise duty on petrol and diesel.

Core inflation, or inflation excluding food and fuel, is seen as a proxy for the level of underlying demand in the economy. While supply issues can keep core inflation elevated, some economists have warned that the resumption of economic activities, particularly services, may also be leading to the emergence of demand-side pressures too.  End

With inputs from Siddharth Upasani

Edited by Shirsha Thakur

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