FE Editorial : RBI needs NIB support

Written by The Financial Express | Updated: Nov 15 2012, 06:14am hrs
With wholesale inflation for October moderating unexpectedly to 7.45% yoy despite the diesel price hike in mid-September, which was expected to drive it up to near 8%, the stage looks all set for a 25 bps rate cut in Januaryfood composite inflation has fallen to an 8-month low and core inflation to a 5-month low, though all this could change if the October numbers are revised like the August ones were. While Octobers fuel index was a bit lower than September, thanks to the fall in prices of bitumen, aviation fuel, furnace oil and naphtha, the overall WPI data is in sync with trends seen in the PMI for the same month, which essentially showed a fairly steep drop in prices of both inputs and outputs with both sub-indices at near 2-year lows. As data indicating core inflation tends to mimic GDP trends with a 1-year lag, chances are inflation could fall further, more so since all projections suggest benign commodity prices in the near future.

The two jokers in the pack, however, are the rupee as well as government policy on MSPs and social sector spending like on MGNREGA. While the last two helped inflation to risethe last round of hikes in MSPs earlier this month could well trigger another round of food inflationthe strengthening rupee helped dampen inflation. The rupee cannot appreciate on a sustained basis with the kind of current account deficit India has, but it is true that when the government was on a reforms overdrive in September, FIIs flows jumped from $1.7 billion in August to $3.8 billion in September. With the government now looking a bit tiredthe much-promised National Investment Board which was to jumpstart clearances for stalled projects still hasnt come upFIIs flows halved in October. The governments inability to hold its end of the bargain is going to make RBIs life tougher.