By Indraneel Pinnamshetty
In a recent survey by RBI on household inflation expectations, it was observed that there is a significant number of people who anticipate a price rise in the near future.
The survey was conducted in 18 cities, and the results were generated from 5,100-odd urban households covering different socio-economic conditions. Above everything else, food price inflation emerged as the most concerning issue for the various households. The average inflation expectations for a three month and one-year horizon increased by 30 basis points (bps) and 60 bps, respectively, over the previous survey round released in August.
Surging prices fueling inflationary expectations
The month of October has brought along changes that otherwise might have made it easier for the RBI to pursue their yearly inflationary objectives. Retail inflation in India picked up and has sped to a seven-month high in October.
Food inflation, led by a rebound in food prices as unexpected rains destroyed crops, contributed to the majority of growth in the inflation index. The price of onions, which forms one of the major components of Indian food, has been on the rise due to tight supplies that have resulted from a relative lack of low humidity in significant parts of the country.
Similarly, crude oil prices have also surged more than 30 percent since June to nearly $65 a barrel, causing a significant pressure on inflation in India. Such price rises in essential commodities, which have a direct bearing on household expenditure, have led to a universal consensus of increased anticipation on inflation shortly.
Spillovers on policy
Price stability has been the dominant concern in RBIs policy-making calculus. Inflation targeting as RBIs central mandate has been emphasised by the consensus position that stated price stability is a necessary precondition to sustainable growth during the amendment of the RBI Act in 2016. This rationale is not hard to understand. An increasing inflation in the country brings about lesser and lesser leeway for the operations of monetary and fiscal policy in the country. This is the key reason why the central bank has decided to keep the policy rates unchanged in its latest monetary policy review announcements.
RBI holds its neutral stance
Ravindra Dholakia, a member of the Monetary Policy Committee (MPC), has voted against the neutral stance as he opined a rate cut in the economy. However, it is of best interest if the RBI maintains the neutral stance on policy rates.
It is a known fact that Indian banks have been under considerable stress due to bad balance sheets. Such underperforming banks are reluctant to translate any lower policies into increased lending, thereby blunting the monetary policy impact. Similarly, any easing of policy rate at this juncture will further add to unanticipated quantitative easing. This is probably through policy rate reduction working in tandem with the impact of housing rent allowances (HRA) in the new pay commissions. Also, farm loan waivers, partial rollback of excise duty and GST rate cuts may all, in aggregation, further affect inflation which makes it all the more a strong reason for RBI to hold on tight to its current policy rates.
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