Given that the signals on inflation are very conflicting, RBI has done well to decide to wait for another month or so before it takes any action on hiking either the repo rate or CRR level—the latter is more likely to result in borrowing costs rising. As this newspaper has been pointing out, the recent surge in inflation is very largely driven by what is happening on food prices. Though not shared by RBI, this newspaper’s view has also been that, going by the data on services sector growth, the continued growth in the services CPI inflation index also looks suspicious. In the event of headline inflation, both CPI and WPI, coming off sharply in the weeks ahead—prices at vegetable shops already reflect this—as RBI Governor Raghuram Rajan put it in the Q&A session, if RBI were to raise rates every time the CPI moved up, it would also have to lower it each time CPI fell.
Given the very fragile economic conditions—IIP has fallen from 8.3% to minus 1.8%over the past 12 months, services growth from 7.6% to 5.9%, and government expenditure has also begun to contract—a further interest rate hike would only queer the pitch further. And that’s assuming banks were in a position to even pass it on—credit growth from banks has been coming off one percentage point in each of the past few fortnights. Even so, the reprieve may be short-lived. RBI Governor Rajan wants a lot more proof the underlying core inflation momentum is slowing and has given himself a window of a month in which he wants to see both a significant lowering of the headline WPI and CPI numbers as well as the ex-food and vegetables inflation. Given the current trajectory, core WPI is likely to fall further—core WPI grew by 3.3% each month on average in the Jan-June period before falling to 2.4% in the July–November period. Core CPI, however, is more sticky and slowed only marginally from 8.5% to 8.4% in the same period. So in case RBI is not satisfied with just the WPI performance, the next rate hike could come a day after inflation data is out on January 13 and 14.