The latest data from the government shows that inflation, as measured by the wholesale price index, has crept up to double digits at 10.16% in the month of April. The revised estimate for April shows that inflation was, in fact, in double digits in that month also, at 11.04%, higher than the original estimate of 9.9%. Does this data require a swift response from RBI?s monetary policy? On balance, no. Of course, inflation has been a source of concern for a while, but the finance ministry is right when it says that at least food inflation, the main driver of overall inflation, has stabilised. In fact, a good kharif crop will result in a further fall in the rate of food inflation. Core inflation, which excludes the prices of food and fuel, stands at 5.8% in April, and is not alarmingly high. The chief economic advisor has said that core inflation should ideally be at 5%. But that does not necessarily call for a monetary tightening right away.
The main argument for retaining a relatively easy monetary policy stance for the moment is the continued uncertainty in the global economy. If Europe slides further into the crisis?and there is little evidence of even a modicum of stabilisation there?it will have a spill-over effect for the rest of the world, including India. Already credit flow from European financial institutions to Indian companies is slowing down. There is plenty of discussion of the possibility of a double-dip recession in the West, especially of big banks that are caught out by the sovereign debt crisis in Europe?s periphery. Of course, there is absolutely no danger of recession in India. But it should be the goal of RBI policy to at least sustain the 8% growth momentum that the economy has just about climbed up to. Inflation may yet come down because of a good monsoon in India and commodity prices may decline further because of a continued crisis in the West. Growth, on the other hand, may take a double hit if there is a global double dip and if RBI raises rates now. We went through a process of monetary tightening in the summer of 2008, only to end up being choked when the real crisis came after the collapse of Lehman. In the medium term, monetary tightening is of course inevitable as growth returns on a more solid footing, but what matters most is the timing. Since crisis clouds continue to loom, it would be best for RBI to wait and watch for a while longer before it takes a call on its next hike.
