WPI (Wholesale Price Index) inflation is at 6.58 per cent; and “in view of the paramount need to contain inflation expectations”, the RBI has yet again upped the cash reserve ratio of banks by half a percentage point to 6 per cent of net demand and term liabilities.
How serious is our current bout of inflation? What drives it? Can RBI’s monetary and credit tightening policies work? If not, what will?
For all of corporate
As the chart shows, the 13-w MA of primary product inflation has been rising since May 2006, and now stands at 8.4 per cent, with no signs of letting up. Incidentally, the point-to-point primary products inflation on 27 January was 10.7 per cent. Manufactures inflation has increased from 1.9 per cent in early May 2006 to 5.2 per cent today, and is still on the rise — with the latest point-to-point estimate being 6.2 per cent. The saving grace has been fuel, power and lubricants, whose inflation has dropped significantly since July 2006, and stands at 4.1 per cent today, with the point-to-point at 3.7 per cent. Had crude reigned at $70 per barrel, we would have faced a WPI inflation of over 7.5 per cent.
If you carefully look at the data, you will be convinced, as I am, that our current WPI inflation is driven largely by supply side factors. That being so, there is little that monetary policy can do other than reduce money supply, hike interest rates and, in the process, possibly choke some of the growth impulse. When inflation is supply driven, it requires freeing up imports of primary products, sharply reducing tariffs on manufactures, and betting on a plentiful rabi crop. In any event, we are possibly looking at over 6 per cent inflation for another month or two.
But since RBI must be seen to be doing something, act it certainly will. So, expect yet another round of credit tightening fairly soon — which will not really dampen WPI inflation but can harm growth.
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