News APP

NewsApp (Free)

Read news as it happens
Download NewsApp

Available on  gplay

This article was first published 2 years ago  » Business » Risks to economy still look uncomfortably high: Experts

Risks to economy still look uncomfortably high: Experts

By Anup Roy
June 16, 2021 14:16 IST
Get Rediff News in your Inbox:

Govt must urgently initiate appropriate supply side measures to address inflation especially in cases of edible oil and fuel.

Edible oil

Photograph: Rupak De Chowdhuri/Reuters

High inflation print is the price that the Reserve Bank of India (RBI) will have to pay to nurse a fragile growth back, say economists.

Wholesale Price Index-based inflation rose to a record high of 12.94 per cent in May, aided by low base effect, but also because of higher fuel and commodity prices.


Retail inflation, too, surprised by rising to 6.30 per cent, while the core inflation, which is the non-food and non-fuel component, rose to an 83-month high of 6.55 per cent.

These numbers are much above RBI’s upper limit of 6 per cent inflation target, but there is very little that the RBI can do at this moment.

The central bank would rather hope that an urgent reduction of taxes by the government brings down prices in the interim.

A rough estimate suggests that every 10 per cent rise in fuel prices in pumps contributes to 50 basis points rise in the headline inflation – 20 basis points as direct impact and 30 bps through logistics and other indirect means.

This can be controlled by lowering taxes for now.

Still, core inflation would remain uncomfortably high for most part of the year.

In normal times, these would have attracted urgent rate action by the RBI. But this is not the time.

“The RBI, at least into the August review, will be inclined to look through the likely high inflation prints.

"The statements will be slightly more hawkish, and flag risks to inflationary expectations.

"But they will likely signal continuing an accommodative stance, growth recovery is still very fragile” said Saugata Bhattacharya, chief economist of Axis Bank.

“As and when the US FOMC taper announcements induce spillovers, RBI now has the space to respond with currency adjustments, rather than just domestic interest rates.

"Oil prices are likely to remain elevated in the near term with strong global demand and low inventories” Bhattacharya said, adding that inflation risks in India might gradually subside with modest demand and easing of supply dislocations.

The bond market, though, reacted to the inflation prints, even as the narrative seems to be tightly controlled by the RBI.

The central bank now holds most of the existing stock of the 10-year bond, and yet, the yields rose to 6.04 per cent from its previous close of 6 per cent.

The movement in shorter tenure bonds was sharper.

“Don’t look for bonds to gauge the market mood.

"Global central banks now control the bond market by being accommodative.

"It is in the currency segment where the fundamentals signal louder now,” said the treasury head of a bank, requesting anonymity.

Indeed, the rupee has been in a losing spree for the past few days.

It was at 72.98 a dollar on June 9, but is now at 73.34 a dollar.

It had closed at 73.18 a dollar on June 14.

There is an urgent need to initiate appropriate supply side measures from the government to address inflation, said Gaurav Kapur, chief economist of IndusInd Bank, especially in cases of edible oil and retail pump prices of fuel.

"An urgent review and a coordinated reduction of taxes and duties by centre and states is needed to curb inflation in this category,” said Kapur.

In absence of price corrections in these two categories, headline CPI inflation can hold above 6 per cent for the next three months, despite the support of a high statistical base, Kapur said, adding, “the MPC however, would continue to put more weight on growth than inflation, as was done even in the last fiscal year, especially as the adverse impact of the restrictions placed to control the second wave of the pandemic on economic activity, becomes clearer.”

Apart from growth and inflation dynamics, the pandemic has brought forward other factors in the equation.

“Economic contraction, persistent inflation, and rising inequities pose severe policy challenges,” said Ananth Narayan, senior India analyst of the think tank Observatory Group.

“While India’s ample currency reserves offer a buffer for now, ultimately, India needs to generate jobs and output through a difficult political and economic context,” said Narayan, who described the inflation print as a ‘shock’ and said core inflation will likely remain elevated throughout the year and along with the headline CPI, may persistently register a compounded annual growth rate of over 6 per cent through FY22.

“From a more medium-term perspective, the risks still look uncomfortably high,” Narayan said, even as India’s $650 billion of foreign currency reserves (inclusive of outstanding forward currency purchases of the RBI) offer a safety buffer and provide additional degrees of policy freedom.

One good thing, all economists agree, is that vaccinations have gathered steam and should help the country come out faster from an economic ‘stagflation’ and ramp up the capacity utilisation.

Get Rediff News in your Inbox:
Anup Roy in Mumbai
Source: source

Moneywiz Live!