As inflation data comes in, the only thing to ask is: is it going up. There are two elements to inflation – the stuff that includes food and fuel (the main ingredients of India’s inflation basket), and the “core’ inflation, which is the secondary layer – everything beyond the food and fuel prices. The core is important because food and fuel prices are known to be volatile – people are used to seeing them go up or down regularly. The secondary inflation – prices of clothes for instance – aren’t exactly volatile and when they start to go up a lot, we have more sustainable inflation.
The overall inflation level is slightly up from before, at a 2.86% level. This remains too low in comparison with the targets of 4% the RBI has, but it’s moving towards it, even marginally.
This however has some base effect – the last year we saw a drop till March and then a rise again. So it has a good chance of moderating again next month.
Core inflation has fallen to 5% from near 6% recently, and its trending down now.
This has an interesting impact, because if core inflation is falling, and inflation remains below the RBI target of 4%, then we should see interest rates moderating. Today, we see fixed deposits providing for 7% returns. Even if core inflation is taken at 5%, we have a 2% real return, above inflation. And borrowing rates are even higher. That’s high enough to warrant a drop in rates, you might think, as inflation remains sustainably low.
Today, the met department announced that the monsoon will likely be “normal”. This adds another layer – because a normal monsoon will mean that food supply will be normal or more, and given that we are already producing way too much food, the next year might see food prices hit even more. Low inflation will remain, and this should help us cut rates even further. Interesting times!