Hold it for-a-while

Hold it for-a-while

It is a great fall and good news on the economic front. The inflation rate has fallen to 2.38 per cent for the month of September, the lowest since October 2009.

It is a great fall and good news on the economic front. The inflation rate has fallen to 2.38 per cent for the month of September, the lowest since October 2009. This heaviest fall is seen in the food and fuel segments. While food inflation has reduced by 1.7 percentage points to 2.2 per cent and the fuel inflation is down by 3 percentage points to 1.3 per cent. In effect, the WPI-based food inflation reduced to 3.52 per cent from 5.15 per cent in August. A cursory view of the components reveal that during the month the vegetables have turned cheaper by 14.98 per cent, while onions fell by 58 per cent. These factors prompted the Narendra Modi government to claim that the steps taken to improve the supply-side have yielded desired results. "We are committed to continue reforms in food markets that will improve the supply responses and keep the inflation at low and stable," assures Finance Minister Arun Jaitley. This apart, in September, the sharp fall in the global crude oil prices leading to reduction in the prices of petrol, electricity etc, also help to the reduction in inflation. In fact, this was another major reason for the fall in the core inflation rate. The fuel and power inflation fell to 1.33 per cent from 4.54 per cent in August. Accordingly, the prices of administered petrol fell 9.42 per cent, against 0.15 per cent in the previous month. Of all these, one can say that there is still an inflationary risk at higher-side, contend some economists. However, surprisingly even the core inflation, which highlights the demand-side pressures on prices, also fell in the month of September along with the non-food manufacturing inflation which declined to 2.8 per cent from 3.5 per cent in the previous month.

It is true that the inflation rate is nearing to the RBI Governor’s comfort zone, but is it sufficient for him to go with the demand to cut interest rates? What if the fuel prices rise in the next few months? In fact, the rate cut is possible only if the present trend continues, says economists. Even the former Finance Minister P Chidambaram, who worked closely with RBI to contain inflation during his tenure, now attributes the decline in inflation is due to fall in the global commodity prices and says the present government steps has no role in it. He calls upon the government to convince the Reserve Bank and see that the interest rates reduced, provided the government believes the price situation would continue at the present trend. Coming to economists’ observation, even in the case of food inflation, they see seasonal factors playing in bring down the prices. For instance, during June to October the prices of vegetables and fruits are volatile due to rainfall and later in the winter the prices get subdued. However, it is a great relief to the economists to note that the new government has realised that fighting inflation is not a problem of the RBI alone. It is reported that the PMO is monitoring the prices of 22 essential commodities on a daily basis, which was not the case earlier. The Reserve Bank venture can decide on the rate cut only if it sees the present levels of inflation are maintainable for the months to come.

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