The Reserve Bank of India's (RBI) monetary policy statement red flags large margins being charged to consumers by retailers as one of the reasons for rising inflation in the economy. For the first time, the RBI has said that "the substantial wedge between wholesale and retail inflation points to the supply-side bottlenecks and large margins being charged to the consumer."
The RBI's projections for inflation in recent past have been completely off the mark. The RBI has now admitted that the outlook for inflation has turned adverse in the last two months.
In October review, the RBI projected average CPI at 6.8 per cent for July-Sept of 2020-21. The actual average CPI turned out to be higher at 6.9 per cent with a substantial increase month after month. July recorded a CPI of 6.73 per cent, which moved up to 6.69 per cent in August, and jumped to 7.73 per cent in September.
The RBI's projection of 5.4-4.5 per cent CPI for the second half (Oct to March) of 2020-21 announced in October policy is also not holding up. The RBI has now projected much higher CPI numbers. The RBI has projected CPI at 6.8 per cent for Oct-Dec and 5.8 per cent for Jan-March of 2020-21.
The actual CPI for October is already at 7.6 per cent, which is way higher than the targeted 4 per cent. "The MPC was of the view that inflation is likely to remain elevated, with some relief in the winter months from prices of perishables and bumper kharif arrivals. This constrains monetary policy at the current juncture from using the space available to act in support of growth," said RBI Governor Shaktikanta Das.
"Cost-push pressures continue to impinge on core inflation, which could remain sticky," he added. While food prices have played spoil sport post pandemic, the danger of inflation also comes from international crude oil prices as economies around the world open and businesses record higher capacity utilisation. Given the government's financial constraints, the retail oil prices are expected to remain at elevated level.
Secondly, booming financial markets and rising asset prices because of surplus liquidity will also contribute to upside risks. Global liquidity is also finding its way into emerging markets especially India as seen from the foreign portfolio investments in the stock market.
Of late, protein-based food items are emerging as a new pressure point. In today's policy, the RBI has said that food inflation has surged to double digits in October across protein-rich items including pulses, edible oils, vegetables and spices on multiple supply shocks.
The RBI Governor today said that a small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes. "Further efforts are necessary to mitigate supply-side driven inflation pressures," said the Governor.
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